Don’t get caught out with interest rates increases

*  Your bank just increased your home loan rate by 0.25% (or did they?)
*  How to keep your lender honest

If you have a mortgage the odds are you will now be paying an extra $50 per month repayment (if you are lucky that is). Last week the Reserve Bank announced an increase in the official Cash Rate and you had better expect more, similar announcements to come in the next few months.

It is ultimately the banks’ decision as to how this translates to mortgage rates (the rate that is meaningful to most Australians). While most of us accept that the banks will pass on the changes to the Cash Rate in the form of mortgage rates that is not always the case and even when it is, is that fair?

Just 41 per cent of ‘Standard Variable Rate’ loans examined by Infochoice.com.au have so far been affected by the 0.25 per cent rise in official interest rates. The actual amount by which lenders raised their rates in response varied from between 0.10 per cent to 0.35 per cent, a significant variation.

Interestingly, 88 per cent of all the banks listed on Infochoice.com.au have already made adjustments to their home loan rates. Only 36 per cent of all Credit Unions and Building Societies and 23 per cent of Non-Bank Lenders have increased their rates so far.

Prior to this month’s official RBA rate increase, at least two lenders were guilty of raising their standard variable mortgage rates outside of moves by the RBA. Heritage Building Society, the biggest Building Society by total assets, and the Tasmanian credit union B&E quietly raised rates on their variable home loans by 0.15 and 0.10 per cent respectively last month.

RAMS Home Loans and Big Sky Credit Union responded to the quarter per cent rate rise by raising their rates by 0.35 and 0.31 per cent respectively.

Hunter United Credit Union and Police Credit Union have only increased their rates by 0.10 per cent.

Are you one of the “lucky” ones whose lender only increases your home loan by 0.25%? Maybe you are not so luck after all.

Cast your mind back just a year ago when the RBA was dropping the Cash Rate, and on average lenders decided to withhold a portion of that decrease. The line the banks used back then was that their real or effective cost of accessing funds was not solely linked to the RBA rate and they were in fact paying a premium which meant that when the RBA decreased rates by 4.25% your mortgage rate may have only decreased by 3.84% (the case for the average customer of the major 4 banks).

If this logic applies then surely the lenders should be increasing their mortgage rates by less than the RBA rate? If we have returned to more “normal” conditions then they should be handing back that 0.41% margin the added last year by withholding a portion of the decreasing rates. Something doesn’t seem quite right here.

It all serves to underline the old lessons for borrowers in the modern world of banking. Don't set and forget your loans and accounts, review them regularly, and shop around comparing widely. Don't be afraid to vote with your feet and move elsewhere.

Home loans are a very competitive area of banking with close to 700 variable and fixed home loan products on offer. Australians who use this knowledge to their advantage will get the best out of their banking.

Don't be afraid to seriously consider lenders outside the major banks after all the risk lies with the lender not you (it’s their money after all) and they are subject to the same strict regulations as the major banks.

Re-financing is often not as expensive and is more convenient than you may think. By reducing your mortgage rate by just 0.25% you could save over $15,000 over the life of your loan while exit fees could be as low as $200.

At the very least, more often than not you may win by going back to your lender and demanding a better deal based on other rates out there in the market.

Are you getting the best deal? Click here to compare competitive home loan products.

RATES SNAPSHOT
National Market Range - October 13
Standard Variable 4.79% - 6.45%
Basic Variable 4.78% - 5.99%
1 Year Intro 3.67% - 6.04%
3 Year Fixed 6.59% - 7.89%
Investment Variable 4.79% - 6.45%

Source: Infochoice.com.au