Home loan lending regulation changes and the cost of rising funding costs is generating what many are referring to as the ‘perfect opportunity’ for banks to raise interest rates. These rate hikes are concerning as they are independent of any Reserve Bank of Australia (RBA) decision.
Many financial experts are suggesting that there are countless reasons why banks will be compelled to increase interest rates on home loans and for them to continue to do this over the next 12-months.
Some of the reasons banks will continue to raise rates include the following:
• Wholesale funding costs.
• Profit margin pressures.
• Obligations to meet regulatory changes.
• The rising value of the Australian dollar.
• Increased compliance costs.
While individuals with money deposited in banks will be happy that their interest rates are rising, others such as mortgage holders will not be as excited due to their costs rising.
Mortgage brokers should aim to educate on how interest rates could possibly change in the future and why this is occurring. By letting their customers know in advance what additional costs they could be facing, brokers can then offer these customers with money-saving solutions. For instance, an easy way for a mortgage holder to counteract the costs of a rate rise is to have an offset account added to their mortgage.
Let’s look at an example.
Let’s say you’re paying 9.20% interest on a $200,000 investment loan. Over 12-months you’d pay back $18,400 in interest. But, if you have a 100% offset feature attached to your loan, and you hold $25,000 in this account, then you’d reduce your interest to $16,000 per year. This is equivalent to an interest rate of 8%.
Another option for mortgage holders when banks raise rates is to refinance their existing home loan. Brokers can assist here as they are able to compare home loan rates on 100s of products, including fixed and variable rate loans. Brokers can then suggest which home loans will give their customers the best options. Another solution may be to fix part of the home loan and leave the rest variable.
The home loan market is highly competitive, so refinancing can reduce financial stress and it can allow mortgage holders to reduce their long-term interest burden. But, it’s important that all refinancing costs are considered before making any home loan changes. Costs that need to be considered include:
• Break fees.
• Interest rates.
• Loan-to-value ratios.
• Property value.
• Home loan fees and charges.
All of these factors need to be calculated and then the costs worked out and autotomized over the term of your new loan. This will allow you to assess if any savings can be made and, if so, how much can be saved.
It’s also important to point out that any savings will not be made immediately, even though the new loan’s rate may be less than the old loans rate. This is attributed to the fact that the new loan will have establishment fees and charges, which can add hundreds to the cost of the loan. This is why lenders have to now offer a comparison rate when advertising home loan rates. These comparison rates include all fees and charges and give a prospective customer a clearer indication of the home loan’s true costs.
As an award winning brokerage who has helped more than 50,000 Australians secure competitive home loans, eChoice brokers can compare the home loan products of more than 25 lenders. These products number in their 100s, so an eChoice broker is able to find the most suitable home loan for you and your circumstances.
All eChoice brokers are accredited and they’re members of recognised Australian broker associations. They assist a customer with their home loan every step of the way, guiding them through the home loan process, and answering any questions. Plus, they offer a cost and obligation free service.
Do you want to know more about how you can reduce your rate pressure? Then contact eChoice today.