Loyalty to your bank or mortgage lender could be costing you tens of thousands of dollars over time, which has led to calls for homeowners suffering cost-of-living pressures to seek better deals as home loan interest rates continue climbing.
And, if you don’t think there’s a price for apathy, the total extra cost of Australians staying with their existing mortgage has been estimated to approach nearly $9 billion annually. As interest rates climb higher – and we’re not sure the RBA doesn’t have more rate hikes on the way – none of us can afford to be complacent about our mortgage interest rate.
Research by Mortgage Choice has found that almost nine out of 10 mortgage holders believe they should get the same interest rates and deals as new customers, but instead they are paying more – an extra 0.41 percentage points according to Reserve Bank of Australia data. That 41-basis points difference can add up to $40,000 over the life of the loan. For a typical half a million-dollar loan, that’s roughly $130 a month, and by the end of your loan term, that’s the price of a new car!
Some mortgage providers are offering new home loan products that ensure customer loyalty is rewarded over the longer term, so it's worth shopping your existing loan product against what's new out there. With these sorts of products existing customers will pay the same rate as new ones, and the interest rate drops automatically as people pay more off their mortgage and increase their home equity. The question to ask though is does the same work in reverse with these products? As always, it’s recommended that you read the Product Disclosure Statement closely.
Research by comparison websites shows almost half of people who refinanced their mortgage did so for a lower rate, and 10 per cent said they switched because their existing lender would not give them the same rate offered to new customers.
However, there are plenty of ways to make your home loan work harder for you, even if you're don’t shop around for a better deal.
If your budget allows, a great way to pay off your home loan faster is to increase your payments. Even an increase of $50 or $100 per month can make a significant impact over the life of your loan.
By paying more than the minimum amount required, you'll reduce the overall interest you'll pay and shorten the life of the loan.
Paying your home loan fortnightly instead of monthly can offer several benefits, because by paying your home loan fortnightly, you're effectively making one extra payment per year.
Another way of making your mortgage work harder for you is by being clear on what you want from your loan, such as an offset account to reduce the interest charged.
An offset account is an account that can be linked to certain types of home loans. Check with your lender which home loans are eligible.
For example, if you have a home loan of $500,000 and an offset account with $50,000 in savings, you'll only be charged interest on $450,000. By using an offset account, you can effectively reduce the interest charged on your home loan and pay it off faster.
As interest rates continue to rise, it is crucial not to be complacent about your mortgage interest rate. While refinancing for a better rate is sometimes an option, the strategies we’ve outlined such as increasing your payments, paying fortnightly, and utilising an offset account can all make a significant impact on reducing interest and shortening the loan term.
Remember to carefully review the Product Disclosure Statement and consider your options to make your home loan work harder for you. By being proactive, you can save money and achieve financial freedom sooner.