How banks price their mortgage book – why you may not be getting the best deal

An understanding of where the market is pricing home loans can save tens of thousands of dollars and slash years off your mortgage, writes Andrew Pribil.

The most common reaction I’m greeted with when comparing my clients’ current lending offer with what’s available on the market is one of genuine shock. Mortgage holders find it difficult to fathom that they can often save 40-50 basis points on their existing loan. For clients with total lending volumes of $600,000, this amounts to a $90,000 in interest savings over the life of a 30 year loan.  To put these savings into perspective, the average home loan repayment in Australia is approaching $900 a fortnight, meaning we are saving the equivalent of 100 fortnightly repayments on the standard mortgage (or almost four years).

I recently met with a couple who have a total lending amount of $1.1 million and were paying 4.90% with one of the major banks. We ended up implementing a solution where half their mortgage was fixed for three years at 4.24% and the other half remained variable at 4.38% (recently reduced to 4.15% following the interest rate cut), with an offset facility also attached. Basically, we saved $6,490 per year in interest or almost $200,000 over the 30 year life of the loan. The clients, who are financially savvy and both have quite successful careers, were of the firm belief they were already getting the best deal available.

This is the key reason why A&C Finance Group offers an annual review of all our clients’ lending. Most people hold the view that as long as they’re on the variable rate, they will enjoy the best deal available with their current bank. Or that if they go into the bank and threaten to leave, they will get the best rate on the market. Unfortunately, this is rarely the case.

Particularly in a low interest rate environment like we are currently experiencing, banks will manage their cost of funds so margins on their back book (medium-long term mortgage customers) are greater than their front book (loans they have recently acquired). In other words, banks will spend more on acquisition than on retention, relying on the fact that home owners will generally ‘set and forget’ once they obtain their mortgage. Most people start to think; I need to pay $x per fortnight, and this is what I’ll do for the next 30 years and eventually I’ll own my home. This behaviour is why banks can rely on making their greatest margins from longer term customers. It is also why everyone should remain aware of shifts in the market.

A&C Finance Group recommends seeing your broker at least every two-three years to understand where the market is situated. What makes this even easier for clients is recent Government legislation that stops banks from charging deferred establishment fees (or early repayment fees) on residential lending. This means that unless a client is locked in to a fixed rate, costs for refinancing and obtaining the best deal on the market are minimal.

To give you an idea of where the market is following last week’s Interest Rate announcement from the Reserve Bank, I have provided an indicative guide below to understand what you should be paying on your loan:

• If you have over $750,000 in total lending, you should be paying no more than 4.18%
• If you have over $500,000 in total lending, you should be paying no more than 4.29%
• If you have over $250,000 in total lending, you should be paying no more than 4.40%

If you are currently paying more than the abovementioned guide suggests, or haven’t had your lending structures reviewed in the past three years, please contact A&C Finance Group to help you understand the best solution aligned with your objectives.

Choices today for a secure tomorrow.

Andrew