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Low levels of financial literacy are leaving consumers without the knowledge to get the best deals on home loans.

A survey of 1000 people carried out on behalf of industry super fund-owned bank ME, found almost 40 per cent did not know how the cash rate affects mortgage repayments.

The cash rate is important because it is a big driver in variable mortgage interest rates.

It is set by the Reserve Bank of Australia and is at a record low of 2 per cent. Generally, the lower the cash rate the lower interest rate on variable rate mortgages.

However, there are other factors at play, such as the lenders’ cost of funding of the mortgages and competition between lenders.

More than 40 per cent of survey respondents did not know the right cash rate. Seventy per cent of 18 to 29-year-olds said they did know the cash rate.

“Financial literacy is a valuable asset and one of the biggest money savers over time,” says Patrick Nolan, ME’s head of home loans.

He says the results show many people do not have a thorough understanding of home loans and how they operate.

“We were particularly surprised that older generations – those who typically have more exposure to home loans – have low levels of home loan literacy.”

Only 43 per cent of those aged 30 to 49 years and 51 per cent of those aged 50 and over were confident with their home loan choices.

Survey respondents did not understand how the various features of home loans work.

For example, 55 per cent have no understanding of an offset facility. And 38 per cent have no understanding of interest-only payments.

“Take offset accounts, which are a savings or transactions account linked to your home loan,” Nolan says.

“The value of the offset account is deducted from your home loan when interest is calculated, which can save you many thousands over the life of the loan,” he says.

Most people are bamboozled by the different types of mortgages.

For example, 45 per cent have no understanding of an interest-only loan and 28 per cent have no understanding of fixed home loans.

“The fact that a large proportion of people don’t understand the value of fixing a portion of their home loans is a concern,” Nolan says.

“It’s a great time to lock in record-low home rates; so people could be really missing out,” he says.

As for help, there are plenty of independent sites like moneysmart.gov.au that give basics and can help explain the jargon.

Also, many lenders have online calculators to assist in crunching the numbers.

ME has a “building financial confidence” program at www.mebank.com.au/bfc.


Posted by John Collett – Money Manager (Fairfax) on 9th June, 2015