Are you affected by mortgage interest rate creep?
Any Australian with a mortgage will know by now that unless they fix their interest rate, they will be subject to interest rate fluctuations during the life of their loan.
Although rates have been pretty stable over the past few years there have been both increases and decreases. Banks and financial institutions are notoriously quick to respond to any negative financial reporting and justify an increase in interest rates.
This phenomenon is something referred to as – Mortgage Interest Rate Creep. So why do banks and financial institutions get away with this and what can be done to avoid being caught out paying too much? Here are three causes of mortgage interest rate creep.
The bottom line
As much as you are a customer of a lender, you are also their revenue stream. An increase in your interest rate will yield a higher return for them. Statistically once people obtain a mortgage if the rate is increased in gradual increments it will go unnoticed for a considerable amount of time. You could be forgiven for concluding that institutions count on this to prolong the time spent paying a higher interest rate.
Cost of funding
This is a very legitimate reason for an increase in interest rates. Financial institutions price their products based on the cost of the funds at a point in time. These funds are secured from a variety of sources, both local investors and overseas. This cost is not always fixed and is subject to a number of forces.
Whilst the cost of funds is a legitimate to justify rate increases – It is for this reason that often times institutions make lower interest rate products available for new customers while old customers are ineligible for the same rates. They have secured funding at a lower cost and have allocated to lend it for ‘new money’ only.
The Reserve Bank
Historically, the effect of interest rates has been primarily driven/controlled by The Reserve Bank. Recently, Lending institutions have absorbed the benefit of some RBA rate reductions and passed on a marginal amount and prior that (when rates were increasing) they passed on greater rate increases than what the RBA did. This has made the job of the Reserve Bank increasingly challenging.
How you can avoid paying too much
The ultimate responsibility for keeping an eye on your mortgage interest rate rests on you. Contrary to what would be best practice, banks and financial institutions do not regularly inform their internal lending managers or brokers when a particular customers mortgage interest rate has increased.
Furthermore – We have not yet heard of a bank or financial institution reaching out to their existing customers to point out that their interest rate is higher relative to the rate new customers are obtaining.
With so many mortgage products and conditions or variations of loan type it is important to be mindful of changes in your circumstances or the Australian Economy that could result in your mortgage interest rate being higher than it should. That is where we are here to help.
Here are some simple things to consider when it might be time to make an appointment with your adviser or mortgage broker
- Since obtaining your loan has the purpose of your loan changed?
- Is any part of your loan interest only?
- Did you fix your interest rate at any time and is it still fixed, or has it converted to variable?
- Has it been more than 18 months since you obtained your loan?
- Has the news cycle included an increasing number of negative commentaries on financial reporting?
If more than two of the above are a ‘Yes’ then it might be worthwhile to review your mortgages to determine whether your current facilities could be optimized in some way to reduce the interest rates and fees.
As a mortgage broker I am able to access product and policy information from a large variety of lenders. Each client and their circumstances are unique and changing. At Celsius we are in touch with our clients when new facilities or rates become available.
Regularly reviewing your mortgages ensures that you are paying the least amount possible in interest and fees on your mortgages.
So should your circumstances change, or your fixed rate is due to expire, contact me on 0418 903 954 or email@example.com.
I can then compare it to the best available on the market. You could be paying too much or have a loan structure that’s not as efficient as it could be.