The home loan news that could save you up to $43,000
The ACCC plans to encourage lenders to give older home loan customers a better deal, potentially saving you tens of thousands of dollars on your mortgage.
One of the worst ways a business can treat a loyal customer is to charge them more for their product than they charge a new customer – but unfortunately, this happens with home loans all the time.
Throughout 2020 as home loan interest rates have continued to fall, many borrowers have found themselves stuck with higher interest rates, while their bank or lender offers steep discounts to new customers.
It's costing consumers a fortune – upwards of $40,000, according to modelling from the Australian Competition and Consumer Commission (ACCC).
The final report of the ACCC's home loan price inquiry has found that many Australians with older home loans continue to pay significantly higher interest rates – and therefore a lot more for their loan – than borrowers with newer home loans do.
If you have had your home loan for at least three years and you haven't either picked up the phone to ask your bank for a discount or you haven't refinanced to a new cheaper home loan, then you could potentially be spending tens of thousands more on your loan than you need to, reports the ACCC.
"A significant number of Australian home loan borrowers have not switched lenders for several years, yet they stand to save so much money by doing so," said Rod Sims, ACCC Chair.
According to the ACCC's modelling, as at September 2020, borrowers with home loans between 3 and 5 years old are paying an average of 0.58% more in mortgage interest than the average interest rate paid.
The average Australian home loan currently sits at around $494,000. A borrower with this size mortgage who refinances to reduce their interest rate from 2.98% to 2.40% (saving 0.58% in interest) could see their repayments fall by $146 per month.
That's an annual saving of around $1,750 in home loan repayments alone.
But that's not where the financial benefits end. According to the MoneySmart home loan comparison calculator, the following big savings could be up for grabs on a principal and interest, owner-occupier home loan:
|Property purchase price||Mortgage @ the full rate of 2.98%||Mortgage if a discount of 0.58% is applied|
|Total loan term/remaining) loan term||30 years/25 years remaining||30 years/25 years remaining|
|Savings per month||$0||$146|
|Savings over 12 months||$0||$1,752|
|Savings over the life of the loan (remaining 25 years)||$0||$43,829|
Taking this one step further, if you were to refinance to a cheaper rate home loan but kept your monthly mortgage repayments the same at $2,337 per month, you would actually make faster headway in paying off your mortgage.
In this situation, you would save a total of $58,454 and own your home 2 years earlier, repaying your mortgage in full in 23 years rather than 25 years.
Sims said there are a number of things standing in the way of borrowers switching lenders to a better or cheaper home loan, including a lack of clear and transparent pricing as well as a process that can be perceived as clunky and time-consuming.
However, comparing and switching loans can be easier and smoother than you think, and for many borrowers, refinancing "will be worth the effort", Sims said.
"Our recommended prompt [to lenders and banks] would clearly set out for many borrowers just how much higher their interest rate is compared to new borrowers," Sims said.
"This information would be a powerful motivation for borrowers to seek a lower rate from their current lender or to switch to a new lender. It would also encourage lenders to offer existing customers better rates, promoting greater competition in the sector."