It hardly seems fair that the more things cost us – think bananas, electricity and petrol – the more we’re likely to have to fork out for mortgage repayments. But that’s the reality of our financial system.
Inflation last week spiked to levels not seen since the introduction of the GST, 3.3 per cent, thanks largely to supply shortages created by the natural disasters in Queensland and the ongoing unrest overseas pushing up oil prices.
This is beyond the Reserve Bank’s comfort range of 2 per cent to 3 per cent and – sorry to ruin your eggs Benedict – puts rate rises back on the table.
High interest rates and a seemingly across-the-board jump in day-to-day costs are the biggest drivers of mortgage stress, a new survey of 26,000 banking customers by Fujitsu Australia says. These replace poor investment performance as our main concern a year ago.
In fact, it’s the need to reduce monthly repayments that prompts one-third of mortgage refinancing.
And Fujitsu says two more rate rises would put us back at historic highs in terms of the proportion of our disposable income sucked up by mortgage interest: 11 per cent. Note that’s interest, not repayment of principal. So it’s money you’ll never see again.
But here’s the thing: rather than nervously waiting for such rises to be imposed on you, you could secure four rate cuts for yourself. Research for our sister magazine Financial Review Smart Investor by infochoice reveals there’s a full 1 percentage point difference between the big four’s average standard variable rate and the best available rate – 7.79 per cent versus 6.79 per cent.
On the average $285,000 mortgage (based on ABS data on owner-occupier loans), the repayment saving is $184 each and every month. Over a year, it’s $2208.
And the figures naturally double if your mortgage is more like $600,000, as it may well be if you live in a capital.
So if you think you are hostage to the Reserve Bank, think again. Switch loans and you will be buffered from its next four rises.
What’s more, a government crackdown means you should pay very little in exit fees from your existing loan.
Lenders have long used sky-high penalties to try to force you to stay but are now allowed only to levy fees that reflect their actual loss. And on loans taken out from July 1, these will be banned altogether.
As the fight for your home loan business intensifies, some lenders are also offering to pay your exit penalties to entice you across. Many are waiving their establishment fees, too. The big four are in there with the best of them with these deals.
But don’t be swayed by any lender’s marketing ploys. What matters most is their interest rate – the savings from a lower rate will nearly always outweigh short-term incentives.
It’s time to ask for a better deal from your current lender and, if it doesn’t come to the party, use your new-found mortgage freedom to actually move to one.
IF YOU’RE still straining to put a toe on to that housing ladder, hang in there. Fujitsu’s report found that the improvements in affordability in 2009, due to lower interest rates and softening property values, largely unwound in the past year. Four interest rate rises in 2010 put paid to that.
But upwards pressure on wages is growing as our economy recovers and high salaries in mining areas draw labour away from the cities. Indeed, that’s adding to the Reserve’s inflation concerns.
On top of that, house prices are again on the wane due to higher rates and the end of the boosted first-home buyers’ grant.
RP Data-Rismark says values slumped the most in 12 years in the March quarter, 2.1 per cent, with falls in every capital. Melbourne dropped 1.5 per cent while Sydney eased 1.1 per cent.
The average Australian city home now costs $455,000. Bide your time and save your money – soon it may not be such a stretch.
Article courtesy of SMH