It concerns me that many mortgage holders are not responding to the very low official interest rate.
In the 1990s the official interest rate set by the Reserve Bank never went below 4.75 per cent. During the 2000s, the lowest official rate was 3.0 per cent, for only six months at the end of the decade.
Now we’re at 2.50 per cent and the challenge for mortgage holders is ensuring they get the best out of this scenario, because it won’t last forever.
The starting point for any reviews on finance should always be information: ensuring you have accurate information, that the information is current, and that you understand it well enough to compare apples with apples.
While this makes sense, you might be surprised at the discrepancy between what people think they know and what they really know.
Yellow Brick Road has just completed a survey of mortgage attitudes and the results were an eye-opener.
The first number that grabbed my attention was the 62 per cent of respondents who had not even looked at how their home loan compared to others in the past 12 months. And 35 per cent had not considered refinancing to get a better mortgage deal.
The RBA’s cash rate has dropped by 2.25 percentage points in the past two years, to historically low levels. That so many mortgage borrowers are not even investigating how they could get a better deal is quite extraordinary.
There was a strong streak of inertia portrayed in this survey.
For instance, 56 per cent of respondents said they had a home loan from one of the major four banks, yet 66 per cent of respondents surveyed believed a competitive home loan rate is 4.9 per cent or less. But hang on: none of the major four banks advertise a variable rate in the sub-4.9 per cent range.
The discrepancy is jarring and it says something about attitude versus behaviour.
There was also a large number who didn’t really know what a good deal looked like, such as the 27 per cent who said they believed a competitive mortgage rate would be 5.0 – 5.4 per cent.
These information gaps and inconsistencies are hardly academic. A person who believes a good mortgage deal is over 5 per cent could be paying way too much – and that’s money that could be used or invested elsewhere.
By way of example, the savings on a rate of 5 per cent compared to 5.25 per cent on an average 30 year, $350,000 loan would be approximately $20,000. Anyone can go to an online mortgage calculator and work out the savings on their own home loan.
Australia’s current low rates are a bonus for those who are motivated. But it starts with you knowing the market. And a low interest rate environment is no time to be complacent.
I leave readers with this challenge: are you paying what you should for your mortgage?
Drop me a line – I’d love to know.
* Mark Bouris is the Executive Chairman of Yellow Brick Road, a financial services company offering home loans, financial planning, accounting & tax and insurance. EmailMarkonmark.neos@ybr.com.au with any queries you may have or check www.ybr.com.au for your nearest branch.