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.
More often than not those fluctuations will be increases rather than decreases. This comes as no surprise as 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 I like to call 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 rates.
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. When money is advanced it is anchored for want of a better word to a tranche of funding. Some of that funding is cash on deposit, some of it is from institutional investors or from the money markets overseas. This cost is not always fixed and is subject to a number of forces.
While the correlation of the source of funds and destination isn’t 1:1 there is sufficient effect 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:
In recent times the effect of interest rate cuts and increases has not had a 1:1 correlation to mortgage interest rates. This has made the job of the Reserve Bank increasingly challenging. 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.
There are many technical reasons why this is happening which most economists can’t even understand, but for us mere mortals all we need to know is that the RBA’s meetings on the first Tuesday of every month are an important factor in determining interest rates.
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 I am yet to hear 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.
Here are some simple things to consider to decide whether you should 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 commentary 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 they can be optimised 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 is unique and may not qualify to borrow they amount they need from every lender. By taking steps to first identify optimisation opportunities as well as calculate cost-benefit time frames I’m able to quickly determine whether the best course of action is to remain and review or refinance and restructure.
Regularly reviewing your mortgages ensures that you are aware of what circumstances can help or hinder your quest in paying the least amount possible in interest and fees on your mortgages. When was the last time you reviewed your mortgage and compared 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.