Paul Clitheroe
Paul Clitheroe

Rates down, but mortgages too high

HOME owners may have breathed a sigh of relief when the Reserve Bank of Australia (RBA) announced its latest cut to official interest rates but keep a close eye on how your lender responds. If you're not getting a decent share of the recent rate cut, it could be time to find a better deal.

The RBA's official cash rate of 3.25% is now at a 3-year low, and the October rate cut will undoubtedly be welcomed by families with a variable rate mortgage as the expensive holiday season is just around the corner.

However despite a string of rate cuts in the last 12 months, many borrowers are still paying more on their home loan than they were three years ago. And there's a good chance many lenders will keep at least part of the latest rate cut from their variable loan customers.

The previous two rate cuts in May and June saw the Reserve bank cut the cash rate by a total of 0.75%. But on average, standard variable rates have only dropped by about 0.53%.

This has made it essential to keep track of your home loan rate and compare it to what is available elsewhere. The cash rate may be at its lowest level since October 2009, but the same can't be said about mortgage rates.

Back in October 2009, when the cash rate was also 3.25%, the average rate on standard variable loans was 5.7%. Today the average is 6.35% - but with some shopping around, you can secure a far lower rate.

With non-bank lender eMoney for instance, you could pay a variable rate of 5.6%, or 5.82% with State Custodians. Among the bigger banks, ING DIRECT's Mortgage Simplifier charges 5.98%. If you're looking to refinance an existing loan, UBank offers a rate of 5.62%.

According to comparison site RateCity, the difference between the lowest and highest variable home loan rates is currently 1.8%. On a loan worth $300,000 that can mean paying an extra $355 per month - money that's going straight to your lender's coffers with no benefit to you.

With so much variation in rates it makes sense to see how your home loan shapes up. If you're not sure what rate you're paying, just pick up the phone and ask your lender.

If you reckon you could get a better deal be sure to go through the numbers first. Refinancing your loan does come with costs. In particular, if you need to borrow 80% or more of your home's value you'll be asked to pay lenders mortgage insurance (LMI) even if you paid it when you first purchased the property. This additional cost can often outweigh the savings of refinancing.

Paul Clitheroe is a founding director of financial planning firm ipac, chairman of the Australian Government Financial Literacy Board and chief commentator for Money magazine. Visit for more information.

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