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Rate discrepancy: borrowers overpay by thousands

Laine Gordon avatar
Laine Gordon
- 3 min read
Rate discrepancy: borrowers overpay by thousands

A ferocious rate war has erupted between mortgage lenders, significantly widening the gap between the best available variable rates and the rest of the mortgage market, research shows.

A study by RateCity has found that the difference between the lowest variable mortgage rate and the highest rate is 2.01 percentage points, with rates ranging from 4.74 percent to 6.75 percent. This compares with 12 months ago when the rate spread was 1.78 percentage points, and two years ago when rates ranged by 1.71 percentage points.

The biggest gap was found in fixed rates; specifically for 5 year terms, which ranged by 2.10 percentage points; and 1 year terms, which range by 2 percentage points.

For a $300,000 mortgage, fixed for 1 year and repaid over 25 years, this gap represents a difference of $349 in monthly repayments and more than $4100 in the first year.

Alex Parsons, chief executive of RateCity, said it’s becoming increasingly important for borrowers to shop around and compare mortgage rates.

“What this means for borrowers is bigger savings for those who seek out competitive rates and more money wasted for those who don’t,” he said.

“The Greater Building Society has announced it will cut its 1 year fixed rate home loan to 3.99 percent today, breaking the 4 percent mark.”

Experts put rate cut odds at 95 percent

Many variable rate mortgage customers may be hoping for their lenders to pass on a possible Reserve Bank-led rate cut tomorrow, said Parsons. But, he says, the real savings could be found by comparing rates and refinancing into a lower rate option.

“Experts put the odds at 95 percent for an RBA cash rate cut tomorrow, which is exciting news for borrowers,” he said.

“But the main thing for homeowners to remember is that they shouldn’t rely on the RBA for a rate cut, which may or may not be passed on by your lender. Far bigger cuts are available by comparing and switching to a better deal.”

If passed on in full, a 0.25 percentage point rate cut tomorrow would put around $44 per month back in the pocket of the typical borrower with a $300,000 home loan and paying the average rate, according to RateCity. Whereas, refinancing from the average to one of the lowest available rates on the market would mean savings of over $150 per month, said Parsons.

“If you can afford to reinvest even some of that into your home loan, it will go a long way to reducing your interest bill. Paying an extra 10 percent in repayments each month towards a 25 year home loan you will slice 4.25 years off the loan regardless of the size of the loan.”

Disclaimer

This article is over two years old, last updated on August 4, 2013. While RateCity makes best efforts to update every important article regularly, the information in this piece may not be as relevant as it once was. Alternatively, please consider checking recent home loans articles.

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