Are You Paying Too Much For Your Mortgage?
On the first Tuesday of October, the Reserve Bank of Australia officially announced another rate cut, taking the official cash rate to a record low 0.75%.
Great news for those who have borrowed money, not so good for savers.
Let’s take a look at two different mortgages and the impact of a slight change in interest rates.
Luke has a mortgage of $400,000 with a 25-year term. He has negotiated an interest rate of 4.00% with his bank that he has banked with for his entire life as he is a loyal customer.
Luke’s mortgage looks like the following:
If Luke does nothing and just continues to make the minimum repayments, he will pay over $230,000 in interest over the life of the loan.
Luke sees on the news that interest rates have been going lower, but his mortgage rate has stayed the same. He calls his lender to ask for a reduction in his rate. Luke’s lender grants him his wish and cuts his rate to a much more competitive 3.50%.
Luke’s new mortgage now looks like this:
Luke’s ten-minute phone call has saved him more than $30,000 over the life of the loan.
Luke decides to go one step further. Before his interest rate was reduced, Luke was accustomed to paying $2,111 every month, so he decides that he will keep his repayments at the higher rate even though the minimum amount is less. Luke’s mortgage now looks like the following:
Therefore, by calling his bank and lowering his rate, and keeping his repayments the same, Luke now saves $50,000 over the life of the loan and the loan is repaid nearly two years faster.
For those who still have an outstanding mortgage, it is worth taking the time to take a look at the rate you are paying and see if you can do better. If your rate is above 4.00%, you are probably paying too much. A quick phone call to your lender may make a massive difference as you can see from Luke’s example above.
You may ask yourself “Why would the bank lower my rate when they can keep it higher and earn more money?”
The answer to this is that it is much easier to keep an existing customer than to get a new one.
Your bank will not want to lose you as a customer as they will lose all those interest payments you will pay over the next 20 or more years. They would much rather lower your rate and sacrifice a little to gain a lot.
Further, with more and more lenders coming into the market, competition for home loans has never been more competitive. This works in the borrowers’ favour.
So, what if your bank doesn’t lower your rate?
If you bank refuses to reduce your rate and you think it is too high, it may pay to move lenders.
Sometimes the threat of moving to another lender forces your bank to lower your rate. Remember, they don’t want to see you go, you have the power.
Finally, remember, it doesn’t pay to be loyal to your bank.
If you would like to discuss your interest rates and see if you are paying too much, please contact our Financial Planning team.