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Ben Kingsley Blog post by Ben Kingsley

Lazy Borrowings – Are they costing you?

Recently we saw CUA (the largest Credit Union in Australia) reduce their standard variable rate by 0.25% to 6.62%.  It was a marketing boon for them, as major media picked up on the story as part of what we will see as continued big bank bashing, given their recent profit results and also the overall market share they hold currently.

The interesting observation was how the ‘media’ looked to highlight how this reduction flowed through in terms of their interest rate offering compared to the big 4 banks’, Standard Variable rates.  However, by reporting this news they pretty much misled consumers to believe that you can get a better deal through CUA than you can with the big banks – unfortunately this is not the case.

Standard Variable rates are pretty much an obsolete measure of what average consumers are paying for their borrowings, as competition by non-bank lenders and the introduction of Mortgage Brokers has lead to the big banks offering ‘special’ interest rates, which were usually reserved for select professional employees such as solicitors, accountants, doctors, etc, that are now available to all borrowers, based on lending amounts.

So today it’s very common in the market to see discounts starting around .5% to .7% off their benchmark rates.  A bit like a hotel selling their rooms.  They set a rack or bench rate they hope to achieve, but the reality of competition in the market means most hotels discount their rates to get business in the doors.

So what does CUA’s rate reduction correlate to in lending terms?  Basically they are looking at their loan book, (that’s all the loans they currently have combined into one overall asset) and we suspect they were losing business on their higher Standard Variable rate.  However, rather than discount their standard variable rate, they looked at their loan book and realized they had very little business on their full Standard Variable rate, so as a strategic marketing and sales strategy they opted not to offer a discount off their full rate, but rather try to create a comparison of their bench mark rate to that of the big 4 lenders.  The result was some very positive media coverage.

Let’s put it into perspective.  Take someone borrowing $250,000 or more (well below the average size mortgage, but a good starting point) – Look at the table below and compare CUA against the big 4 lenders indicative lending rates as at time of going to press;

 

Lender

Professional (Discounted Rates)

CUA

6.37%

ANZ

6.21%

CBA

6.14%

NAB – Homeside

6.04%

WESTPAC

6.31%

 

So in real terms, the interest rate movement by CUA really just bought them back into the competitive end of the market, as they struggle to source competitive wholesale funds to on-sell to consumers over the past 18 months during the GFC.

There are two messages here we want you all to take note of;

  1. Lenders will try to stay market competitive as best they can, and use clever marketing ploys that make for good ‘copy’ for media outlets talking to their consumers and if they become uncompetitive, they lose business through consumers looking for a better deal.
  2. The second and MOST IMPORTANT point to take note of is that if you are paying interest rates higher than what’s being shown in the table above, you might in fact be paying a lender’s ‘full’ Standard Variable interest rate.  If that’s the case you have a “lazy borrowings” and it’s costing you dearly in higher interest payments – that’s your money being eaten up by lenders.

 

Empower Wealth offers free home loan health checks via our Professional Mortgage Specialists, who can review your current loan and determine if there is a better deal for you in the market.  It will take 15 minutes of your time, and it could save you thousands.  Call our offices today.

 

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