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.

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UBank’s USaver, already quite the consumer champion, raised its rate by 0.35% today (effective next Tuesday), lifting it once again head and shoulders above the competition. Having sat out the last Reserve Bank rate rise, eyes were firmly aimed at the NAB-backed upstart to see whether it had perhaps conceded in its revolutionary push towards top spot in the savings account market. Alas for ING Direct and co., UBank had no such ideas, and have once again set themselves at the head of the pack.

Also of great news to existing account holders, was UBank’s rate assurance last night, declaring that until the end of the year at least, that USaver interest rate will not fall below that of their chief rivals (including introductory promotional rates), directly labelling accounts by ANZ, BankWest, Westpac, ING Direct and Commonwealth Bank as their chief competition (though surprisingly no Raboplus…).

So the time’s never been better to snap up a USaver account, once again a good 0.2% or more above its rivals. Get in quick while the rate assurances are hot I say!

Want to make up your own mind? Compare Savings Accounts on 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!

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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

The rise of the online savings account has been the biggest development in the savings account market over the last few years.

Characterised by a higher interest rate, low (if any) fees, set incentives and linked access to a designated transaction account, online savings accounts have quickly become the norm as the technology wave continues to push consumers’ financial management out of the bank branches and on to their desktops.

In what is a new and potentially revolutionary take on the online savings account model, UBank, NAB’s online offshoot, has launched the ‘USaver‘ account. Well, firstly it’s a market leading interest rate of 5.11% (and if you set up an automatic savings plan it goes up another 0.1%). Whereas similar online savings accounts have high introductory interest rates that last for a few months then go down to a reduced base rate, the USaver account is set to one variable rate for life. For example, say you had the Westpac equivalent, the ‘eSaver‘ account – you’d get a special introductory rate (currently 4.3%) for 4 months then it would revert back to a base rate of 2.75% for the life of the account. Not only is the bonus rate lower than UBank’s standard rate, the base rate is less than half!

Interest rates aside, the USaver is packed with handy features. Unlike many online savings accounts, there’s no need to have a linked bank account. You can transfer your money to any other Australian bank account at any time without being charged fees or getting your interest rate penalised. Moreover, you can set up multiple accounts for each savings goal within the one account.  For example, set up one account for travel savings, one for a new car, etc. Each USaver account also comes with a nifty savings tracker, which based on your interest rate and account balance can calculate the time/money required to reach your goals and display it in a snazzy graph.

What’s the catch? Well it’s a variable rate. Where other online savings accounts give you the security of knowing that you’ll at least be getting your 3%, UBank can adjust the rates as they see fit. That being said, as soon as the rates hit a low level it’s not hard to transfer your money across to that old savings account. The other main gripe I can distinguish is the lack of a linked transaction account. With most online savings accounts, you can instantly transfer your savings to your transaction account as they are with the same bank. With the USaver, you’d have to wait a day or two in processing for your savings to get across – though arguably it’s almost another tool to stop you throwing your money away on that extra round of drinks at 1am!

So all up, I’d have to say that UBank really have put out a cracker of a product. A couple of drawbacks aside, it succeeds where it matters – it’s simple to use and apply for, has a fantastic interest rate and some great innovative features. Ubeauty!

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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