Ask any Joe Bloggs off the street if they know what their loan or savings account interest rate is, and chances are they’ll be scratching their heads.
While it’s common for people to vigorously compare their mobile phone and internet plans, many don’t do the same for their loans or savings accounts.
For most Australians, the biggest debt they may hold in their lifetime is their home loan. Yet three quarters of mortgage-holders don’t know what interest rate they’re paying on their home loan, according to UBank’s 2019 Know Your Numbers Index.
So, why bother? Aside from improving your overall financial awareness, here are four reasons why you should be across your interest rate(s) and compare it against the market.
1. You could save money
Interest rates are constantly changing, so chances are yours may have changed since you first joined your bank. Home loan lenders in particular are engaging in an interest rate war to bring in new business. For borrowers not locked in a fixed-rate loan, that could mean competitive rates for new and existing customers, with many home loan deals starting with a 2.
Let’s say you have a home loan of $400,000 over 30 years. You find out your interest rate of 3 per cent is higher than the market average, and refinance to another home loan on 2.5 per cent. That 0.5 per cent difference may mean a monthly saving of $106, or $1,272 a year. To find out how much you could save by refinancing, consider using RateCity's Refinance Calculator.
Note that your lender may charge you a fee to refinance, so make sure you understand what you’re being charged and whether the switch is worth the fees in the long run.
2. You could pay off your loan sooner
Many Australians dream of ridding themselves of their debt, and a good way to start is to find out exactly what your interest rate is.
Continuing with the above home loan example, you now have an extra $106 per month in your pocket and you don’t want to put this surplus cash to waste. One way you could use this money is to make extra repayments on your mortgage. If you contributed $106 each month to your 30-year home loan on top of your monthly repayments, you may be able to take two years and eight months off your loan term. By doing this, not only could you get out of debt sooner, you could also save nearly $17,000 in interest (though this example doesn’t take into account changing rates over the course of the loan).
Keep in mind that not all home loans allow you to make extra repayments, and sometimes you may be charged a fee to exit your home loan early, though the savings you make by clearing your debt earlier may outweigh these fees. Check with your lender for details.
If you have a car or personal loan, it could also make sense to use the extra cash to pay these off, as the interest rates on these loans are often higher than home loans.
3. You could reach your savings goals faster
If you have no debt and you’re prioritising your savings at this stage in your life, you may have looked at term deposits or high-interest savings accounts. Even if you’re a saver, it’s still important to know and compare your interest rate, as this can drastically affect your returns and potentially your income.
For instance, imagine you have a $50,000 lump sum that you’re planning to put in a term deposit for two years. Your interest rate with your existing bank is 1.05 per cent, which may return you $1,050 at the end of the term. But after shopping around, you find another bank that has a 1.55 per cent rate. That simple difference of 0.5 per cent could mean an extra $500 for your savings after two years.
4. It could help you plan a budget for the new financial year
As the new financial year begins, many may be thinking about their big money plans and goals for the year. If you’re about to tee up a new budget for you or your family, one of your biggest ongoing expenses could likely be your debt repayments. As the interest rate you’re paying affects your repayments and in turn your cash flow, it’s a good idea to be across your rate. By understanding your interest rate and repayments, you can accurately assess your regular outgoings.
You should also understand your savings account and term deposit interest rates, so you can better calculate your returns and income.