Are you one of those people who spend hours online or in stores trying to find the best discount on the latest gadget or fashion item?
If the answer is yes and you also have a mortgage, then new data from the Reserve Bank shows you should probably divert some of that time to finding a better deal on your home loan.
That is especially the case if your loan is more than four years old.
“Currently, these loans have an interest rate that is around 40 basis points higher than new loans,” the RBA noted in its latest Statement on Monetary Policy.
On a $250,000 loan balance, that means an extra $1,000 a year of interest payments to the bank — potentially a lot more than you saved on finding bigger discounts on anything else you bought this year.
And, if you have purchased a home in Sydney or Melbourne over the past decade or so, there is a high chance your loan is a lot bigger than $250,000, and so are the costs of not shopping around banks as you might with retailers.
If your loan is twice as big, then the cost of paying that higher interest rate doubles, and so on.
The situation is even more urgent if your loan was written more than eight years ago and has not been refinanced since, with this RBA graph showing that, on average, you would be paying around 60 basis points more than a new customer.
While the Reserve Bank said some of the discrepancy could be explained by a shift in lending from riskier and more expensive interest-only loans to safer and lower-rate principal and interest loans over the past few years, it noted that the interest rates on new principal and interest loans were still a lot lower than their older counterparts.
“This reflects the tendency for competitive pressures to be strongest for new and other borrowers who are in the process of shopping around for a loan,” observed the RBA.
Huge discounts available for some borrowers
These competitive pressures appear to have intensified over recent years, with banks offering substantially bigger discounts on what are known as their “standard variable rates” or SVRs.
The SVR is the interest rate you may see banks and media outlets referring to when they are discussing whether a rate cut or rise has been passed through to customers.
But virtually no-one is on an SVR — if you are, you’re almost certainly heavily overpaying for your home loan.
The average discount on the SVR being offered to new borrowers with the major banks has risen from around 100 basis points just five years ago to well over 150 basis points last year.
The Reserve Bank noted that the very cheapest loans advertised may be around 200 basis points — that is a full 2 percentage points — below the standard variable mortgage rate. That is basically eight official rate cuts difference between paying the bank’s rack rate, to borrow some hotel jargon, and the cheapest discount rate.
While SVRs are the reference rates against which variable-rate loans are priced, lenders also advertise a range of interest rates that are materially lower than their SVRs,” the RBA advised.
“In addition, most individual borrowers are offered, or may be able to negotiate, further discounts on the interest rate applied to their loan.
“For instance, the major banks’ ‘package’ mortgage interest rates for owner-occupier loans currently attract a discount of around 50–100 basis points to SVRs.
“The lowest advertised rates are around 100 basis points lower than those package rates, and a few borrowers receive even larger discounts.”
These figures come from new data that the RBA, bank regulator APRA and the Australian Bureau of Statistics have started publishing this year.
The data is intended to help consumers understand the interest rates that are actually being charged in the market.
It might pay handsomely to keep an eye on them every now and then to make sure that your home loan has not fallen out of line with the better rates currently available.