Don’t sweat on your bank cutting rates. This is how to save $4000 in a year
Cuts to fixed mortgage rates won the major banks favourable headlines on Wednesday, but they also exposed the raw deal given to existing borrowers.
A day after the Reserve Bank cut the official cash rate to a record-low 0.1 per cent, Commonwealth Bank was the first to pull the interest rate trigger.
The nation’s largest home loan lender slashed the interest rate on its four-year fixed home loan to 1.99 per cent, becoming the first Big Four bank to offer a mortgage rate with a 1 in front of it.
But NAB and Westpac soon followed.
NAB cut its four-year fixed home loan to 1.98 per cent.
And Westpac equalled CBA at 1.99 per cent, for most borrowers opting for a four-year fixed, but trumped the pack with a rate of 1.89 per cent for borrowers on a four-year fixed with a loan-to-value ratio of 70 per cent or less.
The flurry of cuts made for good headlines.
But the banks’ decision to leave their standard variable rates unchanged has underscored the importance of shopping around for a better deal.
Consumer comparison site RateCity.com.au worked out how much the average owner-occupier could save if they switched from the average rate on the market (3.19 per cent) to the lowest rate (1.77 per cent, for a loan-to-value ratio of 60 per cent or less).
Assuming the mortgage holder has a $400,000 loan balance and 25 years left on their mortgage, they would save a whopping $4109 from switching banks in the first year alone.
This is almost seven times more than what they would save ($596) if they stayed put and their current lender passed on the RBA rate cut in full.
Fast forward five years and the person who settled for the RBA’s 15 basis point cut – which not all banks will even pass on – will have saved $2874, while the person who jumped ship will have saved $25,402.
“I don’t know that people really understand just how much they can save,” RateCity.com.au research director Sally Tindall told The New Daily.
Of course, many NAB, CBA and Westpac customers could switch to a freshly reduced fixed rate to minimise their monthly repayments.
But fixed mortgages come with caveats.
Ms Tindall said they are “typically a lot less flexible, usually with no offset account, limits on extra repayments, and break fees if you want to get out early”.
And, during the worst recession in almost 90 years, many borrowers lack the means to refinance.
“Governor Lowe has said he believes this rate cut will be passed through as people refinance or renegotiate their home loan, but he’s forgotten about the thousands of Australians who aren’t in a position to do so,” Ms Tindall said.
“These are the people who need this rate cut. But based on the response from the banks so far, they’re precisely the ones who are going to miss out.
“Anyone who’s lost their job, or on a mortgage deferral or who simply don’t have enough equity in their loan to refinance are in mortgage prison.
“They can’t switch lenders. They either have to stick on a high variable rate or fix with their current bank.”
RateCity’s points to consider before fixing a mortgage
- “Will I want to make extra repayments? Most banks have caps on how much extra you can repay while on a fixed rate
- “Do I need an offset account? Most banks don’t offer an offset account on their fixed rates
- “Will I need to get out of the loan early? There can be hefty break fees if you do
- “What is the revert rate? If you do fix, make a note of when the fixed term ends so you can negotiate a lower variable rate, refix or refinance. If you set and forget your fixed rate for the long term it could end badly.”
(As of the time of writing, ANZ had yet to respond to the RBA’s rate cut.)