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Business

Homeowners pay $5k extra in interest on loan over three years unnecessarily

Homeowners pay $5k extra in interest on loan over three years unnecessarily

Sitting back and watching the interest rate rise on your home loan could be costing you hundreds of dollars more a month unnecessarily.

Homeowners are being warned not to fall victim to a “mortgage loyalty tax” by staying with their current lender as banks offer discounts and perks to compete for new customers.

Analysis by RateCity shows all four major banks are offering new customers a significantly lower variable rate than existing customers who have not “haggled” for something better.

The financial comparison site found someone who took out a variable rate loan in September 2019 could be paying an interest rate that’s almost a full percentage point higher than a new customer today.

Looking at Australia’s largest bank as an example, RateCity estimates a Commonwealth Bank customer who took out a $500,000 loan three years ago would have paid an extra $5101 in interest over that time if they had not negotiated.

For a $750,000 loan it is an extra $7,652 in interest and for a $1 million loan it is $10,202.

RateCity explained that in those three years, the bank offered discounts on its lowest variable rates five times to new customers, which meant unless an existing customer called up their bank and negotiated each time, they missed out 0.93 percentage points off their rate.

Addressing RateCity’s findings, Commonwealth Bank said in a statement it was committed to providing existing and new customers with “an array of great value and flexible home loan products”.

It highlighted its “Green Home Offer” where existing customers have access to a low standard variable rate if their home meets certain sustainability and energy efficient criteria.

“We encourage our customers to reach out to us to see how our extensive network of home lending specialists are able to help them find the right solution for their needs,” A CBA spokeswoman said.

The Reserve Bank of Australia increased the official cash rate by 0.50 per cent on Tuesday – the fourth hike in four months.

While the major banks have passed on the rate rises in full to existing customers, they are still offering discounts to bring in new business.

RateCity research director Sally Tindall said banks were “falling over themselves” to offer discounts and perks to borrowers willing to move from a competitor.

“Once the August hikes filter through, a competitive interest rate for owner-occupiers is likely to be around 3.50 per cent,” she said.

“If your variable rate starts with a 4 or even a 5, then you really should question why.”

RateCity found at least 10 lenders have cut variable rates since the hikes began, but only for new customers.

The value of refinanced loans surged by $1.06 billion to $18.16 billion in June, according to the Australian Bureau of Statistics. That is the highest value on record.

As well as rate hikes prompting mortgage customers to shop around, Ms Tindall said many borrowers would be coming off low fixed rate contracts they signed up for during Covid.

“Refinancing hit a record high in June and we expect this will keep on climbing as borrowers roll off their fixed loans, only to find rates have gone through the roof since they last looked at their mortgage,” she said.

“This will in turn push the banks to come up with even more discounts and perks for new customers, particularly refinancers looking to jump ship from a competitor.”

Customers also have the option to call up their bank and negotiate a better interest rate.

“If you do go down this path, do your research before you make the call,” Ms Tindall warned.

“Check what rate you’re on, check what rate your bank is offering new customers, but also what other lenders might be willing to offer you.

“If you have a couple of quotes at the ready for some of your bank’s competitors, they’re likely to take notice.”

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Business

Melbourne single mum struggling to pay extra $360 a month after RBA interest hike

Melbourne single mum struggling to pay extra $360 a month after RBA interest hike

A single mum’s “dream” of becoming a homeowner has become more like a nightmare as she struggles to survive amid the rising cost of living.

Jodi Cameron, 40, from Melbourne, currently has nothing in her bank account after building her house cost more than expected. She can’t even afford to complete the house, with her driveway unfinished because she ran out of cash.

On Tuesday afternoon, she was hit with more bad news; the Reserve Bank of Australia had increased interest rates again, for the fourth month in a row.

It means the single mum, with two daughters aged four and eight, must now fork out an extra $140 every month to pay back her mortgage.

In total, since the central bank started increasing interest rates in May, the family is now paying back an extra $360 a month — money it desperately needs.

“It’s just horrible,” Ms Cameron told news.com.au.

“I do find myself in a situation where paying rent and a mortgage and daycare fees, there’s nothing left.”

Currently, her savings account stands at $0, she said.

The mum worked throughout the Covid pandemic as a disability support worker and blames her current predicament on one thing — missing out on a government grant.

She had factored in receiving a $15,000 grant to help her build her own home but missed out, leaving her financially wrecked.

“I just wanted to own my own home,” Ms Cameron explained.

“It’s just disgusting, it’s so frustrating, I work my guts out, all I wanted was the great Australian dream.”

Her variable interest rate has gone up from 2.79 per cent to 4.5 per cent in the past three months, and is set to go up even further after the rate hike on Tuesday.

“I’m not on a fixed mortgage, I don’t know how I’m going to do it,” Ms Cameron said.

“I’m probably going to have to pull my [youngest] daughter out of daycare because I can’t afford daycare. That also means, how am I meant to work from home with a child?”

As a single mum with no family to fall back on, Ms Cameron had resigned herself to renting but in 2020, she was given hope that she might be able to break into the property market.

The federal government announced the HomeBuilder grant scheme in a bid to increase the disruption to the economy and the building sector during Covids, where eligible homeowners received $15,000 to form part of the payment for a building project for their primary residence.

Ms Cameron met all the criteria for the grant so bought a $263,000 block of land in Lang Lang, a regional town southeast of Melbourne, in August 2020 in the hopes of setting herself up financially for the future.

“I got on the low deposit scheme, I didn’t need a massive deposit,” she explained.

Then in March the following year, she signed a build contract which cost $300,000 for a four-bedroom, two-bathroom home.

She only needed a 5 per cent down payment for the land and the build contracts and was expecting the extra $15,000 from the grant to provide a helpful buffer to afford the progress payments.

But then she logged back onto the HomeBuilder online portal and was devastated to discover she had missed a key due date — which her broker and bank had never mentioned to her.

“I missed a portal cut off date that was never shown or advertised anywhere,” Ms Cameron lamented.

As a result, she was not able to be part of the scheme.

Near the end of her build, the mum ran out of funds and couldn’t afford to pay for a driveway.

“I’ve got no driveway, it’s just mud, I can’t afford it, it’s not nice to have that money you relied on ripped away from you,” she added.

“I owe the real estate the last month’s rent which I can’t pay.

“I assumed I would have this $15,000 to help me out, I don’t have it. This grant meant a lot.”

The mum is now waiting with bated breath as the Reserve Bank is expected to keep hiking interest rates till the end of the year.

[email protected]

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Australia

Interest rates: RBA raises cash rate by 50 basis points to 1.85 per cent

Interest rates: RBA raises cash rate by 50 basis points to 1.85 per cent

For the fourth consecutive month the Reserve Bank of Australia (RBA) has hiked interest rates as inflation runs rampant.

At 2.30pm during the RBA’s monthly meeting, it increased Australia’s interest rate by 50 basis points, or by 0.5 per cent.

The decision brought the cash rate from 1.35 per cent to 1.85 per cent, largely in line with economist’s predictions.

This marks the first time the RBA has lifted the rates for four months in a row since the introduction of the two to three per cent inflation target in 1990.

This follows last week’s increase in annual inflation, which hit 6.1 per cent, which was its highest level in 21 years since 2001.

Tuesday’s rate rise means those paying off the average home loan of $500,000 will need to cough up an extra $140 a month.

And the August hike isn’t expected to be the last, with economists forecasting that interest rates could peak up to two per cent by the end of the year.

As soon as news of the interest rate rise broke, Treasurer Jim Chalmers weighed in and acknowledged it was a tough time for Australian borrowers, saying the announcement would “sting”.

“It’s another difficult day for Australian homeowners with a mortgage,” he said.

“The independent ReserveBank has just announced its decision to increase interest rates by another 0.5 per cent, bringing the cash rate to 1.85 per cent.

“Australians knew this was coming, but it won’t make it any easier for them to handle.

This cycle of interest rate rises began before the election in response to inflationary pressures that began accelerating at the beginning of this year.

“Average homeowners with a $330,000 outstanding balance will have to find about $90 a month more for repayments as a consequence of this decision today, on top of around $220 extra in repayments since early May.

“For Australians with a $500,000 mortgage, it’s about an extra $140 a month, in addition to the extra $335 they’ve had to find since early May.

“As I said, Mr Speaker, this decision doesn’t come as a surprise. It’s not a shock to anybody, but it will still sting.

“Families will now have to make more hard decisions about how to balance the household budget in the face of other pressures like higher grocery prices and higher power prices and the costs of other essentials.”

‘Misleading’: Calls for bank boss to resign

Ahead of the interest rate rise, there were growing calls for the RBA’s board and its governor, Philip Lowe, to resign after a series of missteps.

Chief among them was the promise that interest rates wouldn’t rise until 2024 which one top economist said was “misleading” for borrowers.

Critics also pointed out that the rapid rate rises could inadvertently lead to a recession while at the same time inflation is running rampant.

Warren Hogan, chief economist at both ANZ and Credit Suisse, told The Daily Telegraph that the RBA was guilty of some “pretty bad errors” in recent months.

The RBA lowered the cash rate to 0.1 per cent at the end of 2020 amid the Covid-19 pandemic – the lowest it had ever been – and throughout the pandemic said they didn’t plan on raising the cash rates until 2024.

When it lifted the cash rate for the first time in May and then every month since, Mr Hogan said it was “misleading people, basically”.

He also said Australia’s central bank had taken on risky strategies including spending lots on insurance and sinking funds into a bonds program which had not paid off.

Mr Hogan, who was also the former principal adviser to federal treasury, said: “It’s unforgivable. I think they should resign – the whole board.”

Mr Lowe “should have the character to stand down,” Mr Hogan added.

RELATED: Find out how much the rate rise will cost you

Mr Lowe said the cash rate would remain at its record low of 0.1 per cent until at least 2024, but the rapid rise in inflation this year – caused in part by Russia’s war in Ukraine and supply chain issues on home soil – prompted the monthly hikes .

It comes as Australia’s cost of living crisis is worsening, making borrowers even more cash-strapped than usual.

In the last quarter, transport costs rose 13.1 per cent as the price of fuel rose to record levels for the fourth quarter in a row.

Meanwhile, grocery shopping is also causing hip pocket pain, with Australians outraged to find lettuce heads selling for $10 a pop and capsicums marked at $15 for a kilo.

Interest rates in Australia reached an all time high of 17.5 per cent in January 1990. Since then, they have averaged 3.93 per cent.

Before this year, the last time the RBA hiked up rates was in 2010. It has only been going down ever since.

As a result, more than one million home borrowers have never experienced an increase in mortgage rates, because they bought a home after 2010.

The official cash rate has been at a record low of 0.1 per cent since November 2020 in response to the Covid-19 pandemic until May 2022.

– with NCA NewsWire

Read related topics:Reserve Bank

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Categories
Business

Mark Bouris reveals five tips to safeguarding money as inflation soars

Mark Bouris reveals five tips to safeguarding money as inflation soars

Inflation will very likely hit 7 per cent by the end of 2022, which means there’s more than a fair chance there will be further interest rate hikes passed on to you the borrower before the end of the year, as the RBA attempts to rein spending in order to keep inflation in check.

This is not good news, but there’s no way the Reserve Bank could sit back and do nothing.

We’ve all benefited from cash rate lows of 0.1 per cent. But with it now at 1.35 per cent, a jump that has happened in just three months, you can bet that there’s more to come.

As that rate is passed on to anyone who’s borrowed money and doesn’t have a fixed rate, what can you do to safeguard your investments and where should you place your cash?

1. Think long-term, not short-term

If you have a thoughtful, long-term investment strategy, there’s no need to “chop and change” it just because interest rates are going up.

The worst mistake you can make as an investor is selling when the market has bottomed out or make rash decisions that could result in you missing out on potential returns. A lot of Australians who took the opportunity to withdraw money from their super funds when Covid first hit, missed out on one of the best years for super returns.

If you’re looking to invest for the next 10 to 20 years, it’s best to ride out the interest rate hikes that are coming our way.

That said, if you have a shorter-term “investment horizon”, maybe close to retiring, it may make sense to be more cautious and reduce your exposure to “riskier” assets such as shares.

2. Build up your cash savings

Holding cash deposits in the bank as interest rates rise could be a safe option that will generate some income.

Having six to 12-month Term Deposits are a safe option for those with available funds, with some saving accounts offering higher rates if funds are deposited into them on a regular basis.

Be sure to shop around for the best deal as returns vary wildly between institutions. And before committing to a term deposit, it’s wise to consider your other investment objectives during the time the money will be locked away.

3. Property

Although property is more vulnerable to rising interest rates, some of these investments could benefit.

Rising inflation could be good news for property investors as it could lead to higher rents, which in turn could generate large enough returns to offset the negative effect of higher interest rates. Tight leasing markets and the prospect of higher yields and long-term capital gains should sustain interest in investment properties, despite rising interest rates.

With vacancy rates at an all-time low, now could be a good time to offset interest rate rises by buying more investment properties that will yield great cash flow.

As borders have opened up, we’ve seen an increase and influence of expatriates returning home. Add to this a drop in construction approvals and the government ramping up migration to assist the economy post-Covid – rents will continue to increase significantly in many locations over the next few years, helping to reduce the impact of the rate rises.

It pays to speak to a professional mortgage broker who can help make an assessment of your options with regards to repayments and future lending.

4. The Share Market

Always a riskier proposition but potentially some of the highest returns.

Keep in mind that past performance is not a reliable indicator of future performance and great care is needed when making share selections.

Many people seek the assistance of an experienced investment adviser to do this for them.

5. Bonds

Fixed income assets, such as government and corporate bonds are often seen as providing a relatively stable and reliable return.

When purchasing a government bond, you are essentially lending money to the government which they will pay you back with interest. The interest is paid to you in regular facilities throughout the length of the bond.

Fixed income assets could be considered boring by some investors but having them as part of your investment portfolio can help to offset ant losses you may have had from the share market – hence their classification as a “defensive” asset.

…and a thin red line

All the things I’ve mentioned above are food for thought at one end of your balance sheet, but don’t forget what’s going out at the other end.

My mum used to say, “Take care of your pennies and the pounds will take care of themselves.” Like most motherhood statements, this one is true and makes for good practice right now.

I’m making a list of those ongoing subscriptions I’ve picked up over the last few years and unnecessary money I’m spending in the cloud. It’s a leaner time now and I’m drawing a red line through those that I don’t need or can do without. I suggest you do the same. Make it a habit, not just something to do when times get tough.

There’s a famous Rudyard Kipling poem called If that begins with the words, “If you can keep your head when all about you are losing theirs…” Right now, it’s time to hear those words. Don’t lose your head, keep it sane, simple, straightforward and you’ll come out the other side of this.

Mark Bouris is the Executive Chairman of Yellow Brick Home Loans, for more information on getting the best home loan, refinancing and some of the industry’s leading experts tips visit the Y Home Loans website

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