Buyers: Pay Attention, Not Interest
The Age
Friday July 28, 2006
ARE you a mortgage mug? A lending loser? You are living in an era in which banks are falling over themselves to offer cheaper loans and better service than ever before.
Home owners who have hammered away at their mortgages for the past couple of decades may have been taking good advice but they might also be missing out on developments that make paying more flexible and protect against interest rate surprises.Meanwhile, new home buyers face some of the biggest questions of their lives.There are the classics: How much do I need to borrow? Fixed loan? Variable? Or some combination of the two? Should I renovate? What are interest rates, anyway? And then there is another question particular to this age: Which lender should I choose?Competition from foreign banks, boutique banks and so-called "non-bank lenders" - companies whose core business may not be lending but do a fair bit on the side - has upped the stakes for the stalwart "big four" banks. ANZ, Commonwealth Bank, National Australia Bank and Westpac have also struggled to keep customers from upstarts, including St George and Bendigo Bank.The result is better prices and better service. The banks' interest margin has been shaved from 4.25 per cent in 1993 to just 1.8 per cent today, the Australian Bankers Association says.Right now, anyone can get a discount of at least 0.7 per cent from the banks' "standard rate". If it's been a while since you last refinanced, things may have changed a bit. For the past decade, banks have allowed borrowers to split their mortgages, fixing the interest rate on part of the loan and allowing the rest to move at the whim of the Reserve Bank.Over the life of the loan, rates are likely to move both above and below where they were when the loan began. While repayments on the variable portion of the loan will rise with higher interest rates, repayments on the fixed portion remain the same. When rates fall, you still have to pay the higher rate on the fixed portion, but the variable part will give some relief. Offset accounts have also made things a bit easier. You can withdraw from such an account, but for as long as the money stays deposited, the bank will subtract it from the amount in your mortgage that draws interest. That means you can cut back your interest payments.In the latest development, proposed changes to superannuation tax in federal Treasurer Peter Costello's budget have people pondering taking an interest-only loan and putting payments into super. By the time you hit 60 and can withdraw the money, you may be able to pay off the house and have a bit extra. There are risks associated, so the strategy needs thought before leaping in.The most important point for those looking to their first mortgage or to refinance an existing mortgage is to shop around. Mortgages are like cars. Do you need a Cadillac mortgage, with built-in insurance and discounted credit cards? Or will a safe, reliable Volvo do?
© 2006 The Age