There are several ways to save on your home loan when interest rates are on the rise. Michelle Hutchison investigates.
September 25, 2009
As the economy is picking up, official interest rates are expected to rise. Economists are tipping a string of Reserve Bank rate rises in the next year and many lenders are already raising their fixed rates. But not all home loan providers are jumping on the rate rise bandwagon, which makes now a great time to shop around and see if you can get a better deal on your home loan.
The big four banks – ANZ, Commonwealth Bank, NAB and Westpac – have all lifted their fixed rates in the past month. Some of the latest lenders to follow suit by lifting some of their rates include IMB Limited, Newcastle Permanent and RAMS Home Loans.
Variable rates are also likely to rise in the coming weeks, which will place greater pressure on the majority of Australian mortgagees.
As the Reserve Bank and economists have indicated, rates are likely to rise in the next 12 months, which makes it a crucial time for Australians to shop around for a home loan to compare what’s on offer in the market.
But with so many different home loan rates, how do you decide which is the right one for you?
Making the call
Most lenders decide what rate they will charge you depending on your financial position, which includes how much you earn, how much you want to borrow and sometimes your occupation. Generally, you will get a discounted rate for the more you want to borrow and the more money you earn because it is a stronger investment for the lender.
Even if the advertised standard variable rates of the major four banks seem much higher than many of the lowest rates on the market, you may be entitled to a discount. Larger institutions that provide other products including transaction accounts and credit cards, also offer attractive incentives with package deals.
For example, ANZ‘s Break Free home loan includes a discount of up to 0.7 percent off its 5.81 percent p.a. standard variable rate for loans above $150,000. It also includes an annual fee-free credit card, $600 loan approval fee waived, a free offset account and the $5 monthly service fee is also waived.
ANZ also offers a “no frills” loan without the extras and includes a discount of up to 0.7 percent for loans over $50,000.
Monthly repayments for a typical $275,000 home loan with ANZ’s 5.13 percent p.a. variable rate would be about $1,629, which is a saving of about $73 per month or about $880 per year compared to the current average variable rate for this loan amount, which is 5.58 percent p.a.
Over a 25-year term, the savings could be as much as $22,000 using the above example.
How much could you save?
Or one of the lowest variable home loans currently on the market is by Reduce Home Loans which offers a 4.98 percent p.a. comparison rate for a $275,000 loan. Compared to the average 5.58 percent p.a. rate for this loan amount, you could save about $100 on your monthly repayments, which is about $1,200 per year, or almost $30,000 off the life of your loan.
These examples have not taken into account the cost that incurs when breaking a loan contract if you want to refinance and the costs can vary with each lender as well as the length of time you have had the loan.
And the risk you take with variable rates is their unpredictability which means they can rise and fall at any given time. The above examples were calculated based on the variable rates remaining the same over the term of the loans.
When you feel that interest rates are dragging you down, don’t hesitate to shop around for a better home loan. You could find yourself with a lot more spending money than you currently have.