The Reserve Bank kept official rates on hold this week, which means we have another month at the historically low rate of 2.5 per cent.
However, commentary from economists suggests an imminent rise in official rates.
So how do you take advantage of interest rates on home loans while they’re still low? Think about some of these steps.
Know where you are: Don’t get in a panic about interest rates without accurate information. Develop a picture of exactly how much your debt is costing you. If you can’t readily find the information, get it in writing from your lender. If you’re going to reduce your costs, you have to know your starting point.
Know the market: How does your current loan compare with those of your neighbours? Start on the comparison sites and see the state of the market. Here’s a tip – when it comes to variable-rate mortgages, use only sites that allow you to rank the comparison rate, because this is the rate formulated by law with all the variables included and amortised. Many borrowers take mortgages that start at a low rate designed to catch their attention, only to find that the loan reverts to a higher rate after a year. Start with accurate market knowledge.
Know what works for you: Getting your home-loan costs down can include basic things such as paying fortnightly rather than monthly, or paying extra amounts into the account. These methods typically accelerate paying out the loan, which means you pay less in the long run. But you’ll only do this if you have the right account, so find out.
Know your limitations: If you don’t have a well-informed view on where the economy and interest rates are going, you could look at fixed-rate mortgages that allow you to lock in the low rates for a period of time.
There are many lenders with three-year fixed home loans well below 5 per cent, which represents low-cost certainty for many Australians. Fixed-rate mortgages can also be a good way for property investors to plan their costs. Be aware that banks rarely have fixed rates that allow borrowers to beat the market, but don’t forget that you can also split a mortgage – half fixed, half variable – if you’re still unsure.
Action: If you’re going to take advantage of the current low rates, you’ll need to act. Either get a better deal from your current lender or go to a lender who has a better offer. And people do. More than a million customers have left their financial institutions in the last year.
In my experience, most lenders will find a better deal for customers who are informed and business-like. If you can’t get a better deal from them, then be prepared to switch. When you do this, you must have accurate information and realistic expectations.
Finally, the cost of money fluctuates in our economic system. Your job is simple: to reduce your costs by never paying too much.
What do you think? Talk to me on Twitter @markbouris
Mark Bouris is chairman of financial services group Yellow Brick Road