Interest Rate Creep

Ways to make sure you get a better interest rate

I’m willing to bet that if I reviewed your home or investment loan, I’d find that your interest rate is far too high, and you are unnecessarily paying more interest than you need to be, substantially more in most cases.

Even if we’ve managed to secure a fantastic interest rate for you or you’ve tried to do that yourself, chances are you’re paying more than you should.

How can I make that claim? Because most clients I speak to, are generally being charged a far higher interest rate than is currently available and some Australian banks are known to practice what is commonly referred to as ‘Interest Rate Creep’.

As Interest Rate Creep has been the topic of a number of conversations with my clients recently, I’ve put together this article to help you understand what this means, how much it could be affecting you financially and what you can do about it.

Interest Rate Creep is our name for the practice of banks slowly raising your interest rate..

You might receive a letter from your lender advising you that your interest rate is increasing by 0.20% (or higher) and we ignore the letter, telling ourselves that we’ll do something about it soon. Despite good intentions, most people will not do anything.

On top of that, in the last few years interest rates have been progressively reducing and some banks may not pass this reduction on to their existing customers – or they don’t pass on a full reduction from the Reserve Bank of Australia (RBA).

We often negotiate with banks on behalf of our clients and regularly receive a far different result depending on whether you are an existing customer of the bank or you’re a new borrower. This difference is often as much as 0.5% and can sometimes be a little  more.

That’s why I can make that initial statement and say your interest rate is probably too high and you may be paying too much interest.

So how much is it costing you?

It’s not too hard to figure this out;

  1. Find out the difference between your interest rate now and what it could be (talk to us if you need help with this).
  2. Multiply this number by your effective loan balance (loan balance less offset balance).
  3. Then multiply that by your tax rate and that’s how much it’s costing you.

For example, if your effective loan balance is $300,000 and you’re paying 0.5% too much and your tax rate is 30% then it’s costing you $1,950 per year ($300,000 x 0.5% = $1,500 x 1.3 = $1,950).

What can you do about this?

Firstly, talk to your bank at least every 12 months. Put it in your diary and actually do it. This one phone call could literally save you thousands. All you have to say is that you are thinking of refinancing and ask them what they can do for you. Simple.

Secondly, talk to us. We can advise what interest rate you should be on, negotiate on your behalf or refinance you to a more reasonable lender if need be.

Steve Kellaway – Partner

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