Following home loan interest rate movements in Australia is a full-time job. Trying to predict interest rate movements is impossible.
In the four years between May 2008 and May 2012, the benchmark basic variable rate swung by 3.75 percentage points. In dollar terms, monthly repayments on a $400,000 mortgage fluctuated by almost $1000.
For most PAYE taxpayers, whose incomes don’t typically fluctuate as wildly as interest rates, huge swings in repayments place great pressure on their ability to not only meet their repayments but other expenses too.
If you do start feeling the mortgage pinch you can look around for a lender offering better interest rates to try and relive some of your financial pressures. So when is the best time to compare home loan rates?
When rates rise
When interest rates increase this is perhaps the most logical time to compare home loan rates and consider switching to a cheaper deal. Refinancing into a cheaper rate mortgage could potentially save tens of thousands of dollars over the life of the loan, if not more. For example, a borrower with a $400,000 mortgage repaid at a rate of 7 percent interest over 30 years will pay around $2661 in monthly repayments. But by switching to a rate of say, 6.5 percent, a borrower would reduce repayments by $133 per month and save almost $50,000 over the life of the loan (assuming the rate remains steady)!
When rates fall
On the other hand, when rates fall, inertia is often greater meaning lots of borrowers are more likely to stick with their existing lender and enjoy the automatic reduction in their repayments. But there are often huge savings to be found by comparing home loan rates and switching when rates drop.
For instance, in mid-2012 when the Reserve Bank cut the cash rate by 50 basis points lenders passed on 32 basis points on average to variable rate home loan customers. For the majority of borrowers, however, a rate cut far bigger than the 0.50 percent RBA cut was available by switching lenders. In fact, there were several standard variable loan available at more than a full percent lower than the average of the big four. Clearly, the big savings to be had are still through comparing home loan rates and switching, rather than waiting for the RBA to move.
At RateCity we recommend keeping an eye on the market and reassessing your interest rate regularly – not just when rates move! Since the ban on exit fees was legislated, switching is becoming easier for some borrowers. But before you refinance into a new loan, consider the cost of switching – establishment fees range between lenders and you’ll need to do your research to determine whether it’s worth your while.
The most important thing to remember is to always keep an eye out for a better deal and ask questions of your lender if you are not happy with your current home loan. After all, nothing ventured – nothing gained!
To work out what a home loan switch could save you – use the mortgage repayment calculator. You might be surprised by what’s out there or be humbled by your current lenders great competitve rates.
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