Aussies flushing thousands of dollars down the toilet

Ever fancied the idea of flushing money down the toilet? It sounds ridiculous, yet many Australians do something similar.

If you take out a mortgage and you automatically give your business to one of the big four banks, there’s a fair chance you could be part of the toilet-flushing crowd.

Imagine you were an owner-occupier paying principal and interest who wanted to take out a variable-rate loan of $360,000 to buy a $450,000 property (which would equate to a 20 per cent deposit). Here is what is currently on offer from the big four:

  • Westpac Flexi First Option Home Loan @ 3.88% (comparison rate 4.47%)
  • Commonwealth Bank Extra Variable Rate Home Loan @ 3.99% (4.00%)
  • ANZ Simplicity PLUS Home Loan @ 4.03% (4.07%)
  • NAB Base Variable Home Loan @ 4.17% (4.21%)

Yet as this mortgage comparison table shows, there are a range of lenders that offer lower-rate products. Examples include:

  • HSBC Home Value Home Loan @ 3.65% (3.66%)
  • UBank Value Loan @ 3.74% (3.74%)
  • Bank Australia Basic Home Loan @ 3.74% (3.75%)
  • SCU Basic Variable Rate Home Loan @ 3.77% (3.81%)

Save up to $38,631

Let’s compare the HSBC loan with the Westpac loan (which, by the way, is an introductory offer that reverts to 4.59 per cent after two years). If you had the HSBC loan, your monthly repayments would be $1,647 and your total repayments would be $592,868. With Westpac, your repayments would be $1,694 and $609,798.

That means you’d be paying an extra $47 per month and an extra $16,930 over the life of the loan.

If you took out the NAB loan, you’d be paying an extra $107 per month and an extra $38,631 in total.

It’s important to point out that the cheapest loan isn’t always the best. Also, everyone’s financial circumstances are unique, so for some borrowers the big four will be the best option. But given the amount of money on offer, it makes sense to at least consider using a challenger lender.

Common objections

If there are a range of lenders undercutting the big four, why do three out of four mortgage borrowers continue to use the big four banks?

One reason is a feeling among some Australians that small banks, credit unions and non-bank lenders are risky. However, don’t forget that when it comes to any sort of loan, the party that takes the risk is the lender not the borrower. Also, smaller lenders have to follow the same set of regulations as the big banks.

Another reason people shy away from smaller lenders is a belief that the big banks provide better customer service. However, in the monthly Consumer Banking Satisfaction survey conducted by Roy Morgan Research, smaller lenders regularly outperform the big four. Indeed, in the most recent survey (August), all four of the big banks scored below-average satisfaction ratings.

A third reason borrowers can be wary of smaller lenders is because they may not have any nearby branches – or, indeed, any branches at all. If branch access is non-negotiable, do your research before ruling out a particular lender, because you might be surprised to discover just how many branches some smaller lenders have. It’s also worth mentioning that almost everything that used to be done in branches can now be done online or over the phone.

Did you find this helpful? Why not share this article?

Advertisement

RateCity

The money talks which you don't need to avoid any more

Subscribe to our newsletter so we can send you awesome offers and discounts

By signing up, you agree to the ratecity.com.au Privacy & Cookies Policy and Terms of Use, Disclaimer & Privacy Policy

Advertisement

Learn more about home loans

Who has the best home loan?

Determining who has the ‘best’ home loan really does depend on your own personal circumstances and requirements. It may be tempting to judge a loan merely on the interest rate but there can be added value in the extras on offer, such as offset and redraw facilities, that aren’t available with all low rate loans.

To determine which loan is the best for you, think about whether you would prefer the consistency of a fixed loan or the flexibility and potential benefits of a variable loan. Then determine which features will be necessary throughout the life of your loan. Thirdly, consider how much you are willing to pay in fees for the loan you want. Once you find the perfect combination of these three elements you are on your way to determining the best loan for you. 

What is a variable home loan?

A variable rate home loan is one where the interest rate can and will change over the course of your loan. The rate is determined by your lender, not the Reserve Bank of Australia, so while the cash rate might go down, your bank may decide not to follow suit, although they do broadly follow market conditions. One of the upsides of variable rates is that they are typically more flexible than their fixed rate counterparts which means that a lot of these products will let you make extra repayments and offer features such as offset accounts.

How do I refinance my home loan?

Refinancing your home loan can involve a bit of paperwork but if you are moving on to a lower rate, it can save you thousands of dollars in the long-run. The first step is finding another loan on the market that you think will save you money over time or offer features that your current loan does not have. Once you have selected a couple of loans you are interested in, compare them with your current loan to see if you will save money in the long term on interest rates and fees. Remember to factor in any break fees and set up fees when assessing the cost of switching.

Once you have decided on a new loan it is simply a matter of contacting your existing and future lender to get the new loan set up. Beware that some lenders will revert your loan back to a 25 or 30 year term when you refinance which may mean initial lower repayments but may cost you more in the long run.

Can I change jobs while I am applying for a home loan?

Whether you’re a new borrower or you’re refinancing your home loan, many lenders require you to be in a permanent job with the same employer for at least 6 months before applying for a home loan. Different lenders have different requirements. 

If your work situation changes for any reason while you’re applying for a mortgage, this could reduce your chances of successfully completing the process. Contacting the lender as soon as you know your employment situation is changing may allow you to work something out. 

How can I get a home loan with bad credit?

If you want to get a home loan with bad credit, you need to convince a lender that your problems are behind you and that you will, indeed, be able to repay a mortgage.

One step you might want to take is to visit a mortgage broker who specialises in bad credit home loans (also known as ‘non-conforming home loans’ or ‘sub-prime home loans’). An experienced broker will know which lenders to approach, and how to plead your case with each of them.

Two points to bear in mind are:

  • Many home loan lenders don’t provide bad credit mortgages
  • Each lender has its own policies, and therefore favours different things

If you’d prefer to directly approach the lender yourself, you’re more likely to find success with smaller non-bank lenders that specialise in bad credit home loans (as opposed to bigger banks that prefer ‘vanilla’ mortgages). That’s because these smaller lenders are more likely to treat you as a unique individual rather than judge you according to a one-size-fits-all policy.

Lenders try to minimise their risk, so if you want to get a home loan with bad credit, you need to do everything you can to convince lenders that you’re safer than your credit history might suggest. If possible, provide paperwork that shows:

  • You have a secure job
  • You have a steady income
  • You’ve been reducing your debts
  • You’ve been increasing your savings

What happens to my home loan when interest rates rise?

If you are on a variable rate home loan, every so often your rate will be subject to increases and decreases. Rate changes are determined by your lender, not the Reserve Bank of Australia, however often when the RBA changes the cash rate, a number of banks will follow suit, at least to some extent. You can use RateCity cash rate to check how the latest interest rate change affected your mortgage interest rate.

When your rate rises, you will be required to pay your bank more each month in mortgage repayments. Similarly, if your interest rate is cut, then your monthly repayments will decrease. Your lender will notify you of what your new repayments will be, although you can do the calculations yourself, and compare other home loan rates using our mortgage calculator.

There is no way of conclusively predicting when interest rates will go up or down on home loans so if you prefer a more stable approach consider opting for a fixed rate loan.

What is an interest-only loan? How do I work out interest-only loan repayments?

An ‘interest-only’ loan is a loan where the borrower is only required to pay back the interest on the loan. Typically, banks will only let lenders do this for a fixed period of time – often five years – however some lenders will be happy to extend this.

Interest-only loans are popular with investors who aren’t keen on putting a lot of capital into their investment property. It is also a handy feature for people who need to reduce their mortgage repayments for a short period of time while they are travelling overseas, or taking time off to look after a new family member, for example.

While moving on to interest-only will make your monthly repayments cheaper, ultimately, you will end up paying your bank thousands of dollars extra in interest to make up for the time where you weren’t paying off the principal.

What do mortgage brokers do?

Mortgage brokers are finance professionals who help borrowers organise home loans with lenders. As such, they act as middlemen between borrowers and lenders.

While bank staff recommend home loan products only from their own employer, brokers are independent, so they can recommend products from a range of institutions.

Brokers need to be accredited with a particular lender to be able to work with that lender. A typical broker will be accredited with anywhere from 10 to 30 lenders – the big four banks, as well as a range of smaller banks, credit unions and non-bank lenders.

As a general rule, brokers don’t charge consumers for their services; instead, they receive commissions from lenders whenever they place a borrower with that institution.

What is a guarantor?

A guarantor is someone who provides a legally binding promise that they will pay off a mortgage if the principal borrower fails to do so.

Often, guarantors are parents in a solid financial position, while the principal borrower is a child in a weaker financial position who is struggling to enter the property market.

Lenders usually regard borrowers as less risky when they have a guarantor – and therefore may charge lower interest rates or even approve mortgages they would have otherwise rejected.

However, if the borrower falls behind on their repayments, the lender might chase the guarantor for payment. In some circumstances, the lender might even seize and sell the guarantor’s property to recoup their money.

How do I take out a low-deposit home loan?

If you want to take out a low-deposit home loan, it might be a good idea to consult a mortgage broker who can give you professional financial advice and organise the mortgage for you.

Another way to take out a low-deposit home loan is to do your own research with a comparison website like RateCity. Once you’ve identified your preferred mortgage, you can apply through RateCity or go direct to the lender.

What is breach of contract?

A failure to follow all or part of a contract or breaking the conditions of a contract without any legal excuse. A breach of contract can be material, minor, actual or anticipatory, depending on the severity of the breaches and their material impact.

What happens when you default on your mortgage?

A mortgage default occurs when you are 90 days or more behind on your mortgage repayments. Late repayments will often incur a late fee on top of the amount owed which will continue to gather interest along with the remaining principal amount.

If you do default on a mortgage repayment you should try and catch up in next month’s payment. If this isn’t possible, and missing payments is going to become a regular issue, you need to contact your lender as soon as possible to organise an alternative payment schedule and discuss further options.

You may also want to talk to a financial counsellor. 

How often is your data updated?

We work closely with lenders to get updates as quick as possible, with updates made the same day wherever possible.

Mortgage Calculator, Repayment Type

Will you pay off the amount you borrowed + interest or just the interest for a period?