I write constantly here about reviewing your interest rates (and insurance premiums, etc) but that’s because I’m constantly astounded by how willing large organisations are to take us all for a ride with very subtle interest rate movements and other fees.
I recently noticed the interest rate advertised online for our PPOR and line of credit were a little way from the actual interest rates we’ve been paying. I thought the interest rates on these products would keep pace with both RBA rate changes and changes to the original product but of course that’s not always the case with RBA rate and perhaps not so much the case regarding changes to the loan product.
So I contacted the bank and, after chatting with a representative from the retention department, the rate on our PPOR loan was reduced by .20% (they couldn’t move the LOC rate).
It’s worth noting the rate advertised online is for new loans and the rep I spoke with told me they can’t “match” that rate as our loan was established at a certain point in time when interest rates were likely higher (i.e. when the bank “bought” the money they lent to us). I was told we’d have to refinance to achieve the lower rate.
The rep also mentioned the interest rate isn’t adjusted automatically as the product itself changes and it’s best to review the interest rate every twelve months or so and give the bank a call if necessary—good advice.
So what does .20% actually mean to us in dollar terms, I wondered? Is it $10 per annum and hardly worth bothering about or is $1000 (or more) per annum? I don’t like to wonder these things, I like to know with certainty so I put together a spreadsheet to multiply a given daily interest rate (or part thereof) by a specified amount for a specific timeframe (i.e. 30 days, 1 year, 2 years, etc).
Working off a principal amount of $500,000 (let’s call that the national medium house price, roughly speaking), I was surprised at the results.
For example, let’s say I’m comparing two loan products with an interest rate of 4% and 4.5% p.a. respectively. How much does that extra 0.5% cost per year? From my table (below), intersect the 0.5% column and the 365 (days) row and you can see the answer is $2,500. That’s a lot of money to unburden yourself of every year for no benefit. If you’re capitalising that charge it’s also going to compound in the bank’s favour!
The table shows two sets of columns. The first set with the dark headings shows part percentages up to 1%; the right-most columns with the lighter shading show a range of current rates, increasing at 0.5% intervals.
Have a look and compare the rates on your loans and then talk to your bank—or refinance if you have to (talk to a mortgage broker).
Click the image to see a a full-size version of the table.
I suppose a disclaimer is also worth posting: I'm just a guy, I'm not an accountant, lawyer, solicitor, tax agent, mortgage broker, banker, financial adviser, insurance agent, land developer, builder, government agent, or anything else so I disclaim your application of anything I write here is to be applied at your own risk. What I write may be incorrect and you are best to seek your own professional advice (tax, legal, financial, and otherwise) before entering into contracts or spending your money. Your situation is unique to you and what I write here reflects my experience only. This content is not professional advice and is not tailored to your situation. I’m not selling anything and I do not receive any form of commission or incentive payments for any companies or individuals I endorse. I'm learning too and expect to make many, many mistakes along the way.