Shop to chop thousands off your mortgage

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March 16, 2011

Mortgage holders breathed a sigh of relief earlier this month when the Reserve Bank of Australia (RBA) chose to hold the cash rate at 4.75 percent for the fourth consecutive month. But don’t hold your breath for too long. Industry experts say that a lack of movement in rates may be causing complacency among Australians, which are accruing more household debt than in the past.

In 2010 Australians grew their home loan balances on average by almost $20,000 per household compared with the previous year. Based on 2010’s average home loan of $285,533, that spike means you are paying more than $4000 in extra interest than in 2009, RateCity has found.

It’s a troubling scenario for some home owners, says Michelle Hutchison, consumer advocate at RateCity.

“The outlook for home owners is worrying this year, with slowly rising property prices, interest rates expected to continue rising and more debt held by households,” she says.

It’s important to also consider that lenders may lift rates regardless of the cash rate movements, which we’ve seen in the past six months when financial institutions raised rates well above the cash rate to the surprise of the market.

Credit card debt is creeping up too, according to RBA data. Australians now have $49 billion collectively in credit card debt, which is almost $2.4 billion more than December 2009 levels.

But it’s not all bad news for those with mortgages or credit cards. Recent stability in interest rates has opened a window to work on lowering your debt levels. By reviewing your budget, controlling spending and making higher repayments towards your debts where possible, you’ll chip away at any outstanding loans.

Households should also look to balance transfer credit cards and consolidate debts as well as compare home loans online to ensure you’re not paying more than necessary.

For instance, State Custodians has one of the top home loan rates on RateCity at 6.79 percent. By comparison Gateway Credit Union has a Standard Variable home loan at 7.34 percent, which is close to the average standard variable rate in the market. By selecting the lower rate mortgage you could potentially save around $90 each month or almost $27,000 after 25 years for a $250,000 loan size.

Of course there are fees and conditions to consider when making the switch to a new home loan and you should always consider any exit fees connected with your existing loan. But by shopping the market on a financial comparison site you’ll likely find a better deal, which will help you save money now and you’ll ride out future RBA rate rises.




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