A RESIDENTIAL mortgage is not a short-term arrangement: the average term of an Australian home loan is 30 years. Clearly it is a major and long-lasting commitment. But it certainly isn’t a ‘set-and-forget’ situation, for two main reasons.
Firstly, because your personal and financial situation can change – and your current loan may no longer suit you best. Secondly, home loans are a very competitive market – there are hundreds of mortgage products on offer in the Australian marketplace – and your loan may simply have fallen out of competitiveness with other products.
Every home-loan borrower should review their loan regularly. The loan is not a favour to you from the bank: it is a financial product that is supposed to be performing a job for you. Think of a regular review as putting your loan to the test – how well is it doing that job, and does it deserve to keep your business?
Reviewing your loan regularly is important because people’s lives are constantly changing. As your personal circumstances change, so can your financial needs – and you might find your financial flexibility being affected. Your employment status could change, or you might start a family: leading to increased costs, with less income coming into the house. This could affect your loan repayments.
On starting a family, it might be a natural progression to want to move to a bigger dwelling: a larger property inevitably comes with higher costs, and a bigger loan. Other changes, such as an increase in salary or a higher valuation on your property, can work to lower your risk, and encourage lenders to offer a better deal.
Knowing this, it’s a good idea to keep challenging your mortgage broker or your lender to demonstrate that your current loan is the best one for you.
On average, Australians change their home loan every three to four years – as recently as 2009, that figure was once every seven years. Heightened competitiveness in the mortgage market is one reason for that, but so is increased savviness on the part of borrowers.
Interest rates are the obvious first comparison that many people would assume in assessing loans.
We are in a period of low interest rates: the long stretch of low interest rates since the global financial crisis has continued well into 2015, and Australia’s official cash rate has stood at a record low of 2 per cent since May 2015.
The last time the Reserve Bank of Australia (RBA) increased the official rate was in November 2010.
The markets for variable-rate loans – priced off the official Reserve Bank of Australia (RBA) cash rate – and for fixed-rate loans, which are priced according long-term interest rates in the money market, are both highly competitive. Banks and other lenders move rates around constantly.
The ‘comparison rate’ is a handy tool to help borrowers identify the cost of a loan. It is a rate that includes both the interest rate and the fees and charges on the loan, combined into a single percentage figure. Lenders are required by law to include a comparison rate when advertising a loan interest rate.
The rate incorporates:
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But even the comparison rate doesn’t tell you the whole story.
The loan amounts and terms shown on a comparison rate schedule don’t represent all of the possible combinations of amounts and terms. If your loan is for a different amount or term, the true cost of your loan could also be very different. Different fees can also result in a different comparison rate.
Borrowers have to remember that comparison is not always about the interest rate – fees, loan features and functionality can also be very important. It pays to be very aware of how ‘functional’ your loan is: whether it offers a redraw and offset facility, and whether it has any restrictions on repayments, whether it or restrictions on a split between fixed-rate and floating.
If it does have any restrictions, get a very clear understanding from your mortgage broker or your lender as to what trade-offs you are getting for this lack of flexibility. When reviewing your home loan, ask whether there are any features it has that you don’t use; that’s just as important as knowing what features it doesn’t have. Flexibility is very important, particularly the ability to switch your repayment schedule from monthly to fortnightly, which can significantly decrease both your loan term and the interest owed.
Likewise, you should always assess your mix (or preference) between fixed and floating – does it suit the current situation? The fixed proportion of your loan gives you the certainty of knowing your repayments. At record low interest rates, fixing part (or all) of your loan may make sense: again, interrogate your mortgage broker or your lender on whether it suits your particular situation.
When you compare lenders’ loan rates make sure you compare their rates over the long term. Many lenders offer short-term incentives to lure customers, but over the long term you may end up paying more.