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Home loans: How much should you really be paying?

Home loans How much should you really be paying?

Amy Bradney-George reports on how to rate your home loan to see if you’re getting a fair deal.

February 24, 2010

As interest rates increase, mortgage repayments can start to become a challenge for people with variable rate home loans. It is one thing to sign up for a mortgage, but what happens a year or two later when your interest rates and circumstances may change?

Variable rate home loans provide attractive mortgage deals, but there is a need to manage them well. It is important to be prepared when rates rise, which means regularly reviewing your loan situation.

Interest rates have been gradually increasing since October 2009, along your mortgage repayments. If these payments are starting to become more noticeable then it is important to consider how to best manage your home loan.

The ups and downs of interest for variable rate mortgages is no mystery to people who have had their home loan for a while. But it can cost borrowers more than necessary if other options are not explored.

Last year, interest rates dropped to an all time low as the Reserve Bank of Australia compensated for the recession. Through most of 2009 it was not out of the question to find a variable rate loan for around 4.5 percent p.a.

A typical $300,000 variable loan on that rate meant monthly repayments of $1,667.50, whereas a current average rate of 6.30 percent would cost nearly $2,000 per month.

Compared to one of the lowest comparative rates for a $300,000 loan on RateCity of 5.7 percent p.a. repayments would be about $1,878 per month, which is $122 per month cheaper than the current average.

Over a 25-year loan, the difference could amount to $36,600, which is a big reason to compare home loans online.

Even though the above examples do not take into account break costs and establishment fees and other charges that may result from switching home loans, the savings can potentially make a big impact on your finances.

By regularly reviewing the rate you are paying, and considering whether there is something more affordable available, is one way of ensuring some control over how much you really pay for a mortgage.

Look at your repayments and calculate how much more you’re paying compared to better deals on the market. If you’re paying more than 50 basis points more in interest, than it’s time to start shopping and make some savings.

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