Australia’s sluggish economy and weaker housing market has placed a lot of pressure on the Reserve Bank of Australia and the monetary policy levers being used.
The business cycle is about peaks and troughs, and with the present trough unlikely to be a permanent fixture, the economy will pick up at some point, and so too will interest rates.
But for now, the cash rate is at an unprecedented level and, with rates so low, it feels as though we can borrow free money if we choose the right lender and are constantly reviewing our debt.
Not all lenders are passing on the full rate cut to borrowers, and a lot of variance in pricing remains across lending institutions. Borrowers need to be conducting a mortgage review to ensure they are benefiting from the current low interest rate environment, and should bear in mind the following:
- If you’ve been with your bank for more than two years, then you are probably paying too much. Banks love loyal long-term customers, because they can charge loyal customers a higher interest rate. The longer you set and forget your home loan or any other loan, the higher the rate you’re likely being charged.
- Refinancing debt – provided it’s not a fixed rate – is not necessarily costly. In most instances, when you consider the discharge fees of approximately $700, outweighs the benefit of the competitive rate you are getting with the incoming lender. Taking out debt is a large impost on family expenses and, as mortgagees, we live with this expense for 30 years or more, so you want to make sure you have shopped around and are receiving the best possible rate.
- If you don’t fit one lender’s policy, you might fit another’s. Policy variance is also common among lenders. For example, if you have just started work and are still on probation, you do not need to wait for your probation period to end – there are lenders that offer super competitive rates to consumers that are still on probation.
- The wisest borrower is always keeping their lender on their toes. Annual rate checks are a must and ringing your bank and renegotiating your rate is also important (excluding those on fixed rates). Failing to renegotiate an expiring fixed rate loan or interest only loan can also potentially cost you. A fixed rate home loan or interest only loan will automatically be rolled into a variable rate loan with no discount with most lenders if you don’t ask the question.
- The low interest rate environment has become the new normal, so much so that a lot of the lenders are offering a super competitive fixed rate, lower than any variable rate on the market. Fixed rate loans can bear large break costs if broken early, so understanding the fixed rate contract you are entering with your lender is important.