Most of us take a blase interest in the menial difference between interest rates when making choices for our finances. We assume the difference will be insignificant or not really worth the hassle of switching. A 1% difference in interest rate may not sound like much, but as we’ve discovered, it could make a real change to your savings.
Colin Wiliams of Humble Savers raised the point in a interesting blog he wrote recently called, “What is the real cost of 1%?”. Colin looked at how a difference of 1% makes to fees paid on a $100,000 investment over 30 years.
Here’s his example:
The Real Cost of a 1% Fee on your Investment
Table 1 – Value of $100,000, earning 7% each year
|Years||0% Fee||1% Fee||2% Fee||3% Fee|
And as you can see, the difference between paying a 1% fee and a 2% fee could mean a difference of $142,155, over 30 years – now that ‘1%’ has my full attention.
Colin’s analysis is based on fees that investment funds charge, which is usually based on a percentage of the total balance in the fund, but it got us thinking about our everyday banking products. How would a 1% difference in interest rate effect our Home Loan repayments or Savings?
The effect of a 1% difference in interest rate on a home loan.
A home loan is one of the biggest financial decisions most of us will ever make so you want to make sure you are getting the best deal possible. So, why pay $100,000 more than you need to? Let’s crunch the numbers. If you have an average home loan of $350,000 for a term of 30 years and you’re paying the average standard variable market rate of 6.44%, your monthly payments would be $1,878 and over the life of the loan you’d pay a total interest of $676,200.
Now taking the exact same loan amount with a 1% lower Interest rate of 5.44%, shows you’d have repayments of just $1,578 a month, and pay a total of $571,200 interest over the life of the loan. That’s a difference of $105,000 – the equivalent of a luxury new car.
Monthly repayments on home loan
Total paid over the life time of home loan
Here’s some competitive rate home loans that you could be saving on:
Loans.com.au Dream Catcher- home loan with a 5.65% variable rate, 6.02% comparison rate
MyMortgageFreedom.com.au low rate+ – home loan with a 5.66% variable rate and 6.02% comparison rate
AMP Essential Home Loan– home loan with a 5.90% variable rate and , 5.92 comparison rate
Compare all home loans at :mozo.com.au/home-loans
How about your savings?
If we take a look at savings accounts we’ll find much the same story. There’s a massive difference to your savings with just a 1% difference in interest rate. If you were planning on putting away $10,000 for a healthy 10 years at the standard interest rate of 3.95% you would earn $4,834 in interest earnings. This sounds like a great amount but had you chosen an account with a 1% higher interest rate, you would have had a total of $6,388. That’s an extra $1,554 – roughly a return flight to your favourite holiday destination.
Earnings on interest rates with a difference of 1% over 10 years
Check out these high interest savings accounts:
Compare them all at:mozo.com.au/saving-accounts
The lesson to be learned from this is, although a 1% difference may not sound like a big deal, it is! We should all spend a little time comparing our options, testing them against each other with a Financial Calculator, and we could be doing our money (and our lifestyles) a big favour.