By Terry Ryder, 9th August 2012
Financial comparison website RateCity is telling borrowers to beware “clever tactics from desperate lenders”.
Michelle Hutchison, spokesperson for RateCity, says borrowers need to watch out for tempting deals by lenders which encourage them to spend their extra cash (from the two recent rate cuts) rather than pay down their home loan.
She says that while the Reserve Bank decided this week to leave the cash rate unchanged at 3.5%, many variable rate borrowers have extra financial capacity following two rate cuts in May and June.
The RBA cut a total of 75 basis points in May and June and lenders in response have cut their standard variable rates by an average of 52 basis points. This is worth $103 per month in savings for a $300,000 home loan - based on monthly repayments over 30 years, at the average standard variable rate of 6.88% at May ($1,972) compared to the current average rate of 6.36% ($1,869).
Hutchinson says lenders are struggling in a tough home loan market. “There is less home loan activity, low consumer confidence and more people saving their money and paying off their debts as opposed to spending and taking on more debt,” she says.
"Many borrowers are adding their extra savings on to their mortgage repayments, which is a smart way to save. But some lenders are getting desperate and we've noticed new tactics which are encouraging borrowers to spend their money rather than save on their home loan.
"For instance, some borrowers with savings sitting in their home loan are being told they can absorb their savings by paying smaller than the minimum home loan repayments. As an example, you have $500 in savings on your home loan and instead of paying your minimum repayment of $2,000 per month, you are offered to pay $1,983 and the difference will be deducted from your $500 savings each month.
"While it's a tempting idea to pay less than the minimum, it defeats the purpose of making higher repayments to save on interest and pay off your home loan sooner.
"Borrowers need to check their letters carefully regarding any changes to their home loans and contact their lender to make sure they understand how much they are actually paying on their home loan.”
In the wake of the second consecutive monthly “on-hold” decision by the RBA, mortgage broker Mortgage Choice says now is the time for borrowers to seek out the best home loan deal.
In a climate of uncertainty, there may be more room than many borrowers expect to secure good rates – so long as they know how.
“With talk still of another rate cut coming, borrowers may view the decision this month to hold the cash rate steady as more of a hindrance than a help. Yet now more than ever, official interest rates are only one part of the home loan picture – there is more that can be done to secure savings and repay your home loan sooner, as long as you know where to look and what to look for,” said spokesperson Belinda Williamson.
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