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3 home loan borrower mistakes to avoid

Aussies are pretty good when it comes to comparing home loans. But once they have their loan and settle into their house, there are some fundamental mistakes they tend to make.

Many borrowers wait eagerly for the Reserve Bank (RBA) monetary policy decision each month (otherwise known as the meeting at which, on the first Tuesday of almost every month, the RBA decides whether to raise, lower or leave the official cash rate on hold). This is because our official cash rate diretcly affects the home loan interest rate we pay.

When the cash rate falls, our home loan interest rates tend to fall. When the cash rate rises, our home loan interest rates follow.

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Currently, Australia’s official cash rate remains at a historic low of just 1.50% percent, with the last movement in cash rate way back in August 2016. After the RBA Board’s most recent monetary policy decision meeting, RBA Governor, Glenn Stevens, left the door open for further rate cuts if inflation stays low. Watch our video commentary or read more about the cash rate decision here.

 

Home loan mistakes borrowers make

Whether or not there is change in our official cash rate in any given month, home loan borrowers can be lulled into a sense of inertia. This is a huge mistake because chances are they could be saving money on their home loan. Here are three easy mistakes to make:

Considering a home loan, see our comparison table below which provides a snapshot into the current lowest monthly repayment rate for first home buyers interested in variable home loans available, with links direct to the providers website. Please note that this table has been formulated based on a $600,000 loan with a LVR of 80%, for properties in NSW.

Mistake 1: Paying a high interest rate

Currently on the Canstar home loans database, the difference between the highest and lowest advertised rates for standard variable home loans is a whopping 2.29%. That margin is far more than our current official cash rate!

Specifically, the highest advertised rate for standard variable home loans (residential) currently on the Canstar database as at 5 June 2017 is 5.73% p.a., and the lowest is 3.44% p.a.. What rate are you paying?

Based on a $300,000 home loan over 30 years, these are the monthly repayments you could expect at various interest rates:

Loan Interest Rate Monthly repayment
$300,000 3.59% p.a. $1,362
$300,000 3.85% p.a. $1,406
$300,000 4.74% p.a. $1,563
$300,000 5.35% p.a. $1,675
$300,000 6.11% p.a. $1,820
Source: Canstar. Based on $300,000 loan over 30 year loan term.

So reducing your home loan interest rate from the current average to, say, 3.85% p.a., could save you an easy $157 per month.

Sometimes you don’t even need to switch banks – just follow our tips to negotiate a lower interest rate with your current lender. Simply give your current lender a call, mention what type of interest rate you could get elsewhere, and ask them what they can do for you.

If you do want to switch home loans, you can compare home loans here to see what interest rates are being offered by financial institutions:

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Mistake 2: Paying monthly instead of fortnightly or weekly

The beauty of paying weekly or fortnightly instead of monthly is that, if you simply divide your monthly repayment in half, it tricks you into making an extra payment each year (because there are 26 fortnights but only 12 months). This does pay off in the long run!

Based on a $300,000 home loan at a hypothetical standard variable interest rate of 4.74% p.a., paying fortnightly rather than monthly could have your loan paid off more than 4 ½ years sooner.

Loan Interest rate Monthly repay Fortnightly repay Repay over 12 months Time to pay off loan Total cost
$300,000 4.74% p.a. $1,563  n/a $18,756 30 years $562,728
 $300,000 4.79% p.a.  n/a $781 $20,306 25 years, 6 months $516,656
Source: Canstar. Based on $300,000 loan over 30 year loan term.

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Mistake 3: Not reviewing your mortgage

Even when the official cash rate doesn’t move, you should review your mortgage each year. Currently on the Canstar database there’s a big difference not just in the highest and lowest home loan interest rates, but also in terms of what fees and features are available – so shop around.

Also make sure you get a regular valuation on your property – and as soon as you have built up 20% equity in your home, phone your bank and negotiate. Canstar research has found that having 20% equity in your home can help you lock in a lower rate loan. Even an extra 25 basis points off your mortgage (-0.25%) could equate to around $45 per month in savings. And that’s money for nothing!

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