the mozo blog

I warned you.  Westpac were off the mark early on Tuesday morning with an aggressive term deposit rate, and I blogged that it would put pressure on home loan rates to increase beyond the RBA.  Bingo!  Westpac was first out with that announcement as well, so clearly they’d planned the whole thing: put out the term deposit good news first to take the sting off the home loan bad news.

St George are matching the Westpac term deposit offer, so no prizes for guessing what their home loan rates will do.

Now watch the other sheep follow the leader.

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Compare term deposits at mozo.com.au

Yet another RBA announcement looms. Apparently someone (God, Galileo or the Greenwich Mean Time Monster) has organised calendar dates in an effort to inflict as much pain on borrowers as possible – seriously, how can there be so many Tuesdays in every month?

In light of this startling revelation, we thought it would be a good chance to gauge the thoughts of the mortgage community who are, unfortunately enough, staring down the barrel of 18 months of gradual pain.

To make this amazingly easy for us, The Daily Telegraph have put together a short survey around Tuesday’s meeting, which can be completed at this very clickable green link. For those of you in the community who think the Reserve Board is out of touch, or would like to pen an imaginary message to RBA overlord Glenn Stevens, then you will find this a convenient, interwebs based soap box.

So despite the cash rate reaching 50 year lows, and staying that way almost long enough for even the most indecisive property owner to fix a pretty special rate, the Monetary powers that be are again falling back on their old tools. Now it appears people must brace themselves for a good, healthy dose of monthly electroshock therapy. Let’s just hope it ends better than it did for Jack Nicholson.

Need help with the pain? Compare Home Loans with Mozo to find a better a deal.

Yes, you heard me. Unfortunately for all you people out there with big huge ones, the truth is finally out. The smaller they are, the better. Mortgages that is; and there are no pills or herbs that can help you. On the upside, you can still benefit from a competitive interest rate and a well-structured repayment plan.

So how do you make your enlarged debt shrink sooner? First of all, jump into a cold shower, refresh yourself, and then log on to a comparison site like this one and do the research. There’s almost always a better interest rate to be found and it’s probably not going to be with one of the major banks.

Secondly, once you’ve found your desired financial partner, you’ll have the option of making weekly, fortnightly or monthly payments. Now here comes the maths…

Let’s take a mortgage of $300,000 to be paid off over 25 years at an interest rate of 6.00%. We can break it down into three repayment methods: monthly, fortnightly and weekly. (Those with high debt and low attention spans can skip straight to the results.)

Monthly:

Total Interest: $279,871.26
Payment: $1,932.90
Time (months): 300

There are fewer actual payments to be made, so the bank has to ask for higher repayments to cover the cost of the loan over the 25-year period.

Fortnightly:

Total Interest: $279,535.51
Payment: $891.59
Time (fortnights): 650

Now we’re looking slightly better on the interest payments front; however, those extra payments you’re making haven’t had much effect, because the bank averages your payments out over the 25-year period. You’re paying slightly less every fortnight but it’s made up by the fact that there are more actual repayment dates.

Weekly:

Total Interest: $279,391.57
Payment: $445.69
Frequency (fortnights): 1300

OK then, basically you’ll only save a total of $479.69 in interest payments over the life of your 25-year loan by choosing the weekly option. Big deal.

So here’s the secret: pay your mortgage using a bi-weekly method. The bank’s fortnightly method is still 26 payments a year like the bi-weekly, but it’s at a reduced rate so they keep you as a customer for the full 25 years. What you SHOULD be paying every fortnight is simply half of the monthly payment (otherwise known as bi-weekly), which in this case is $1932.90 divided by 2, or $966.45.

At $74.86 more than the fortnightly payment, the bi-weekly makes a big difference:

Bi-Weekly

Total Interest: $228,991.19
Payment: $966.45
Frequency (bi-weekly): 650

In effect, using the bi-weekly method, you’re making one extra repayment a year and you save $50,880.07 in interest payments over the life of the loan.

For all of you who’ve made it to the end of the article, you’ll shave 5 years off the life of your loan, bringing it to 20 years! Not a bad result for 2 minutes of reading.

Compare home loans with mozo.com.au

The fastest thing on four legs on Cup Day was in fact the major banks, with their fastest-ever reaction to the RBA rate rise.

After last month’s RBA rate rise, I wrote here about the Underhanded, not even-handed way that the major banks passed on the increase faster than they passed on previous rate cuts.  Across all their home loans, that little trick saw them pocket something like $17 million extra in October.  Our story was also picked up by the Daily Telegraph.

Well clearly the banks read it as well.  But instead of embarrassing them into being fairer to their customers, it seems all I managed to do was encourage them to screw you even harder.  The Big 4 managed to pass on the November RBA rate rise even faster than the last one!  When the RBA cut rates by 1% in February, it took the major banks an average of 8 days to pass on the cut and in April it took 10 days.  Last month they passed on the RBA rate rise in just over 5 days, and this time around they’ve taken only 3.5 days.  It is staggering to think that, had they passed on the 1% cut in February as fast as they acted this month, borrowers could have saved as much as $80 million.  That is simply taking advantage of their market position, and taking you for a ride.

And that’s what I call Shocking!

Compare Home Loans with mozo.com.au

So normally the Mozo Blog keeps you up to date with great deals, bank tricks and savvy financial moves. But today we wanted to tell you about a newly awarded tool that could save you a bunch — ourselves!
Abandoning our usual modesty for a moment, our Health Check feature was named a finalist for ‘Best Online Tool’ in the SmartCompany Web Awards. (Of course, we always suspected that Mozo’s unique facility to instantly compare your home loan or credit card with the rest of the market was pretty special.)

It confirms our place as Australia’s best website to help you through the money maze, saving you on fees and interest, as well as time.

So if you’re credit card or home loan is looking a little sick, give it an (awarded) Health Check! Let us crunch the numbers to see who’s the best performer for your personal financial situation.

See what all the hypes about: Health Check Your Credit Card, Health Check Your Home Loan, Health Check Your Personal Loan, Healh Check Your Car Loan.

We’ve heard plenty from the major banks of late about how their funding costs are going up, and how they just “have to” pass on those increases to you, their customers.  (Of course, just as much of the reason is that they want to and perhaps most importantly, that they can.)  

But in watching the banks’ reaction to this month’s Reserve Bank rate rise (as we do each month on our Reserve Bank interest rates page), we’ve seen something that clearly goes beyond passing on cost increases and is a clear demonstration of them squeezing customers for greater profits:

They passed on the RBA rate rise faster than they passed on RBA rate cuts.

In February and April this year, the Big 4 passed on the RBA’s rate cuts an average of 9 days later.  But this month, when the RBA increased the official rate, the average was only 5.25 days.  Just by speeding things up a little, the Big 4 banks get to charge that extra 0.25% for an extra few days – and on a total home loan portfolio of $650 billion, those numbers multiply out to $17 million.  And that’s on top of the fact that not all of the last few RBA rate cuts were passed on at all.

What can be the justification for this?

If they can raise rates in 5 days, why couldn’t they move in 5 days when the RBA was cutting rates by 1%?  In December 08 and February 09, Westpac did manage to do that but ANZ, Commonwealth and nab steadfastly stuck to their 9 day delay (or in one case, did not pass any cut on at all!).  And then in April, Westpac went the other way and took 12 days to pass on the cut.  So they’ve all managed to hold onto a rate cut for longer than necessary, and longer than they are willing to hold onto a rate rise.  And we’ve seen evidence of the same sort of thing this month from several of the smaller lenders – including AMP Bank, HSBC, ING Direct, ME Bank and MyRate – who seem more than happy to follow the lead of their bigger rivals.  

You have to start wondering whether a home loan industry that is so dominated by a few players doesn’t need a little extra regulation to turn underhanded practices like this into something more even-handed.  

But they say that sunlight is the best disinfectant, so Mozo will keep shining the light on this one.

Compare Home Loans with Mozo.com.au

To “pop a cap” is a common and mostly American piece of street parlance meaning to shoot someone or something. Now I’m not here to propagate the shooting of mortgage brokers or the riddling of bullet holes in your home loan agreement (as much of a thrill as it may be). What I am here to talk about is the popping of a different kind of cap. Last week, Bankwest launched Australia’s first capped home loan, the Bankwest Capped Rate Home Loan, a move which is likely to cause quite a stir in the home mortgage market.

So, what exactly is a capped home loan? Well the basic premise is this – for a fee, Bankwest are guaranteeing that the interest rate on your home loan will not go above a certain level (7.5%) until November 2011. Bankwest will first put you on a variable rate (currently at 5.4%) and if the rates go down you will pay less, but when they go up you’ll only pay up to the maximum rate. Bankwest is essentially selling ‘peace of mind’ given RBA increases are now a reality and the inevitable recovery of world economies after the global financial crisis.

It sounds like a no-brainer – competitive rate, a guarantee on rates for 3 years all for a nominal fee  - or so Bankwest would have you believe. What’s the catch you say? First off, you’re paying more than you would for a normal loan in fees. To get the cap, you have to fork out a fee (0.15% of the loan amount). If you’re borrowing $250,000 for example, this fee totals $375. Moreover, unlike any other variable rate loan by Bankwest, the exit fees for leaving is set at 1% of the loan outstanding at the time of exit – quite a sizeable amount if you’re only 2 years into paying off a loan of that size.

The real deal breaker in the whole equation however is the capped rate. Is it worth paying the extra fees to safeguard against interest rates going above 7.5%? Will rate rises go above and beyond the 2.1% needed to make the cap effective? Only time will tell, but it is a lot of interest rate rises in just 3 years. Moreover, if you are worried by rising interest rates perhaps you would derive more security in fixing all or part of your loan? Bankwest’s 3 year fixed rate is a good 40 basis points lower than the cap’s upper limit.

Despite the potential drawbacks, this home loan product could be heralded as the opening salvo of what is sure to be an intriguing period in the Australian home loan market as interest rates begin to rise. What will be interesting is to see how the market, particularly, the ‘Big Four Banks’, respond to Bankwest’s initiative. Watch this space, as there’s sure to be plenty more shots fired in the coming months.

Compare Home Loans with Mozo.com.au

It’s time to pull out your calculator and do some simple sums on those mortgages. And the sum to do is to take your current interest rate, add 2%, and see if you can cope with the adjusted repayment amount. Because that’s where we are headed.

There is now no doubt that the RBA is done with its rate lowering cycle. We’ve all been hypothesising on this for a while, and the RBA itself has now essentially confirmed it.

In fact, Glenn Stevens has gone further, and indicated that rates need to go back to “normal” levels, which he defined as “a good deal north of where the cash rate is now”.

Reading between the lines, I think the RBA is indicating that 5% is more normal to it. That’s a 2% rise from here. And given that we’ve all got used to “unusually low” rates (as Glenn Stevens refers to the current state of play), that will feel like a large rise.

This prediction may be unsettling for first home-buyers or those looking to refinance – for a typical loan of $250,000, this 2% hike will mean an extra $300 in monthly repayments. Use the Mozo Home Loan Health Check to see if your loan is costing you more than it should.

So the only question now is WHEN rates will start to move up…
My prediction is that it isn’t when the RBA next moves on rates that we need to worry about, it’s when the banks do, because I think they’ll be first. Regardless of when the RBA decides it’s time, I’ll place a $20 bet that the banks move before it does anyway.

And it may be sooner than we think. No bank will want to be first, but one of them will go at some stage, and as soon as that happens, the one thing you can be completely sure of is that the rest will follow quickly. They act in unison – always have, always will.

So just when we least expect it, at a time when the news flow will allow it to get through without too much push back, one bank will move rates up, and the rest will follow.

Given all that, and a world where rates are about to start moving in a one way journey north, it’s a good time to do some quick sums and make sure you can cope with an extra 2% on your mortgage.

Compare home loans with Mozo.com.au

The question I get asked more than any other right now is – should I fix my home loan?

My answer, as from an hour ago, is clearly yes…

The reason is that the Commonwealth Bank has just put its standard variable home loan rate UP! The NAB has said that rates are under review, and the other big banks are no doubt doing the same. This means that regardless of whether the RBA keeps cutting rates or not, the banks are clearly signalling that they are done with cutting theirs.

I also think that we are at, or very near, the bottom of the Reserve Bank rate cutting cycle anyway. There is light at the end of the economic doom and gloom tunnel, our resources driven economy continues to show signs of strength, our government continues to announce spending plans, and there is renewed optimism. All this points to a recovery of business activity and growth. In fact we are seeing it as well, with things like advertising rates going up in the last month with our own advertising. All this growth reemerging means the RBA can stop the rate cutting, probably now but perhaps a small additional cut or two at most.

Even before CBA’s move today, the banks have stopped passing on rate cuts. The last RBA cut was a Claytons rate cut, because the banks didn’t pass it on anyway (well only 40% of it to be precise). It was a clear message, they’re done going down. CBA’s move today is simply a continuation of that message.

It is also worth considering that picking the exact bottom isn’t necessary anyway if you take a long term view. Even if there is a little further to go (and if there is we can only be talking small drops, we’re already at the lowest rate level ever), over a long term view we’re so close to the bottom that long term decision making should be rewarded.

So all that says to me that it is a good time to lock in a fixed home loan rate while we’re at or near the bottom of the rate cycle. If you lock in a fixed rate for say 5 years, it’s hard to see how that won’t be a lower rate in 2014 than the variable rate will be by then. In all likelihood we’ll be back in booming economic times and the rate cycle will be up already or on the way. A decision you make today could lead to a pleasant experience reading your home loan statement in 5 years!

In fact I happened to see an email newsletter from March 2008, just over a year ago, and it advertised the My Rate Home Loan at 8.44%. My Rate Home Loans are now at 4.99%. If rates can come down that fast in a year, then think how much they could move up over the next 5 years.

And locking in a fixed rate today can get you rates well below this March 2008 level. For example with RAMS Home Loans you could get a 3 year fixed rate at 5.89% and a 5 year fixed rate at 6.49%. To lock in that sort of rate for that sort of time seems nothing but sensible to me.

Fix now before the banks move their fixed rates up. This is inevitable now in my mind, as they try to quickly adjust. Be savvy and move before they do.

So fix away and sleep well. Over the long term it will be a winning decision.

Compare fixed rate home loans with Mozo.com.au

I had to pinch myself yesterday as I absorbed the headline “John Symond defends banks’ decision to pocket rate cut”  (check it out, and the reactions, at Lending Central)

What the….? Is this THE John Symond. The world really has changed.

When John Symond starts defending the banks you know something is wrong. The problem is, there are no challenger brands left, at least not on the lending side. In recent years the most successful challenger brands in lending have been Aussie, Wizard and BankWest. They have connected with consumers in a way the old players just cannot do, and have brought really strong products to market. And surprise, surprise, all were successful in attracting large volumes of customers away from the big banks.

So how does Commonwealth Bank respond, by competing with them on product and marketing? No, they take them out of the market instead. They bought BankWest, bought a stake in Aussie, and Aussie bought Wizard and swiftly killed the brand entirely. So we wake up today with a very different world where competition in banking is just not what it was. And that’s bad news for consumers.

So essentially Commonwealth Bank is now left to develop products and marketing as they see fit. Here’s an example I just saw on a banner ad this morning - ”No annual fees forever on the Low Fee MasterCard. That wasn’t so hard, was it?”

No, it wasn’t hard at all. Which is why I want to know why it took so long to do it? The no annual fee ever promise has been in the market for 6 years.

But worse than that, let’s look behind the headline message and see what the offer really is. Clicking it takes you to a page which then says:

“No annual fee for Commonwealth Bank customers who take up a new Low Fee credit card and spend $1000 per year. Annual fee $24 for non-Commonwealth Bank customers”

So in fact it isn’t even a no annual fee forever card at all!! And why market something on a widely shown banner ad that is actually only available for your own customers?? And never mind the fact that the interest rate is 18.49%.

When product development and marketing is left in the hands of the big banks it’s not happy times for consumers unfortunately. Let’s hope some new challenger brands are on the horizon, because Australians need them.