It’s a great irony that while many people love to moan about Australia’s greedy banks, the majority of homeowners continue to take out their mortgages with one of the big four: NAB, CBA, Westpac or ANZ.
Why do most Australians take out mortgages with the big four banks?
This is strange behaviour, not least because the big banks charge around one per cent more than the comparable home loans from cheaper providers on the market It’s an expensive mistake: borrowers are paying around $1billion a year in unnecessary interest, and consumer groups are, quite rightly, urging homeowners to stop throwing money down the drain and to switch to a better-value deal.
How much could I save by switching?
The average Standard Variable Rate (SVR) loan with the big four banks is around 0.8 per cent higher than comparable home loans are available from smaller lenders, saving borrowers with a $300,000 mortgage up to $150 a month, or $1,800 a year.
Any borrowers prepared to forgo some of the “bells and whistles” on more sophisticated mortgages such as offset accounts or redraw facilities can save even more, with so-called “basic” home loans available from as much as 0.9 per cent cheaper
According to Damian Smith of Ratecity, a comparison site, a borrower with a $400,000 home loan only needs to achieve a 0.40 per cent saving on their home-loan rate, even taking account of $1,000 of switching expenses, to be ahead and saving money after just one year. “There is ample scope to save good money in today’s market and virtually nobody should be paying their lender’s Standard Variable Rate” he said. ”The only reason to be paying over the top is apathy. And with almost everybody free from exit fees nowadays, the only expenses you need to worry about are valuation fees and a couple of other legal fees – but some lenders even cover these costs for you. The message is simple – switch to a better deal while you can.”
Where are the best deals?
The best deals on the market are from mutuals such as credit unions and building societies, although “prime” borrowers with big mortgages and lots of equity will often be given preferential “secret” deals by the banks, so if you fall into this category, see what one of the big four will offer you – word among brokers is that they will offer very generous rates for good customers.
Most lenders offer a so-called professional pack which combines a mortgage and transaction account, and offers a discount off the SVR averaging around 0.60 per cent in return for an annual fee of around $300. So most people should not be paying more than about 0.6 per cent less than the SVR. If you are paying more, ask your bank why.
Refinancing has become a little easier and cheaper for some people since the abolition of mortgage exit fees in July 2011, which prevented lenders charging fees, typically $900, for leaving their loan within a certain timeframe.
Lenders’ Mortgage Insurance
However, this cost pales into insignificance compared to the potential expense of Lenders’ Mortgage Insurance (LMI), payable on all loans over 80 per cent of the property’s value every time you take new mortgage. LMI can total thousands of dollars and completely eradicate the savings made by taking a cheaper rate. Outrageous as this is, it means that the first step for anybody wanting to get the best rate on their home loan is evaluate the equity in their home. If they have less than 20 per cent equity, and require another mortgage of more than 80 per cent, it is highly likely that it simply isn’t worth switching.
The only alternative for these borrowers is to save up more money to use as a deposit and lower their LVR, get parents to guarantee the loan, or stay put and haggle with their existing lender.
Asking your current lender for a better deal quite often results in them offering you a reduction on your rate
“Asking your current lender for a better deal quite often results in them offering you a reduction on your rate, but only the very best customers – those with big loans, lots of equity and perfect repayment records will get the best deals. Others are often offered token reductions which make very little differnce” said John Manciamelli of Mortgage Choice.
So pleading with your existing lender is worth a try but may not get you very far.
What advice can you expect from your lender?
Do not expect your bank – or any lender for that matter – to tell you the best or most efficient way to structure your home loan. It is in their interests to squeeze as much money out of you as possible, so they will not alert you to little tricks to help cut your costs.
For example, ensuring you have an offset account linked to your home loan is a must for many people, especially those with any savings.
If you have a $100,000 mortgage and $10,000 in your offset account, you will only pay mortgage interest on $90,000. That means you are effectively earning interest at the mortgage rate, tax free. Say you’re paying 7 per cent, that equates to a gross return on that $10,000 of around 10 per cent. And no savings account in the country comes anywhere near that.
Having your salary paid into the offset account will also help, because it reduces the balance of your mortgage at payday, and keeps saving you money until you have spent all your wages.
The same goes for overpayments. Even paying an extra $50 a month will knock nearly 18 months off a 25-year loan term and save over $20,000 in interest.
Seeing an independent mortgage broker can pay dividends for this type of advice – never rely on the salesman at your bank.
Don’t take the word of your bank – they’re not independent.
Wherever possible, avoid arranging a mortgage where Lender’s Mortgage Insurance is payable this insurance does not benefit you, only the lender
A mortgage is the biggest loan you will ever have, you WILL investigate moving to another lender every year or two if a saving looks possible. There’s no value in blind loyalty to any particular lender.