There isn’t a mortgage holder in Australia who doesn’t hold their breath on the first Tuesday of every month, waiting to hear what the RBA decides to do with the official cash rate. So far this year we’ve had three rate cuts, so most mortgage holders are paying less for their home loan today than they were at the beginning of the year. That savings might be small or significant, depending on your lender and what kind of loan you have.
With rates falling, I’ve been getting a lot of questions about what people should do with their home loans. So I’ve put together some of the most popular queries to help you get a better idea of what you should be doing to give your mortgage the right treatment.
Q: Is it best to have a fixed rate or a variable rate mortgage?
A:With interest rates falling, variable rate loans make more sense right now. The major banks are offering some very attractive fixed rate loans, and it is in their best interest to lock customers into one rate for a period of time. But for borrowers, variable rate loans are getting more competitive and they often have more flexibility and better features. It’s worth noting that there are often options to fix part of your loan and leave the other part variable. This is a good strategy if you need some safety and security.
Q: Why do smaller lenders often have lower interest rates than the big banks?
A: Big banks have shareholders to answer to, and their goal is to increase profits to keep those shareholders happy. As I write this, the Big Four banks have an average interest rate of 6.62% on their standard variable rate mortgages, which means they are adding around 3.37% “margin” onto the official cash rate of 3.25%. Smaller lenders are a bit more nimble, so they can usually operate on a lower margin and therefore offer a better deal to their customers.
Q: How can I best compare different rates and options?
A: There are a lot of lenders out there, so rather than going to just one place, I suggest talking to a mortgage broker who can take a look at your personal situation and find you the best loan based on your needs. If you want to do your homework beforehand, there are plenty of comparison websites you can use. I like Ratecity.com.au and Mozo.com.au. Remember, a home loan isn’t just about the rate. Features including offset accounts and flexible loan payments are important, as are the fees associated with the loan. Think about what you’ll need both now and in the future and always know what you’re paying for.
Q: What’s the best thing to do with the money I’m saving on my mortgage?
A: The cash rate has gone down 1% over the past year, so let’s use that as a simple example. Say you have an average $300,000, 30-year mortgage. Just as an example, let’s say your rate has gone down from 7.62% to 6.62% this year. That 1% works out to just over $200 per month in savings! If you can, I would strongly suggest putting that savings back into your home loan. On the same $300,000, 30-year mortgage on an interest rate of 6.62%, that extra monthly payment of $200 will reduce your payments by seven years and will save you over $106,000. You can work it out for yourself by using the home loan calculators on Ybr.com.au