Buying a home is likely the largest investment we’ll ever make, and one of the simplest strategies we have to spend less on our mortgage is to ensure that we have a competitive interest rate on our home loan.
And yet, an alarming number of Australians don’t know what their interest rate is, according to a nationally representative survey by Mozo.
With a significant amount of borrowers in the dark, two important issues come to the fore – mortgage holders could be paying thousands more than they need to in interest, and a lack of financial literacy is likely hurting those it would benefit the most.
This is troubling as our survey also revealed that those who don’t know their home loan interest rate are more likely to have a lower income compared to those who do know it.
In our second home loan report this year, we’ve also identified that those who compare home loans at least once a year tend to have a lower interest rate, highlighting the importance of understanding our finances.
Almost half of us are feeling out of control with our expenses, but as our report shows, a move such as refinancing a home loan has the potential to save us thousands as we work to pay off the debt.
Mozo found that a staggering 2 in 5 Australians (41%) surveyed with a home loan did not know what their interest rate was.
It’s a highly concerning number, given that your interest rate is the key factor in determining how much you spend on your mortgage, and therefore how much you’re able to save or spend on other items.
In our first home loan report of 2024, we asked a different cohort of mortgage holders the same question, and 42% admitted they didn’t know what their home loan interest rate was.
This data suggests that a large group of Australians could be paying more for their mortgage than they need to, and it’s important to address this after Australians have experienced the most aggressive rate hiking cycle since the early 1990s, and the cost of living is front of mind.
“Understanding financial products and what your priorities are is very important as you could end up paying for services and features that you don’t need, and won’t use, when there might be an alternative that gives you what you need at a lower price.
“We often use financial products over a long period of time, think of a home loan or insurance, and paying even a little more than we need to can add up to a significant extra cost over many years.”
– Peter Marshall
When it comes to getting a home loan, the vast majority of us choose one of the Big Four banks – that’s ANZ, Commonwealth Bank, NAB or Westpac.
Approximately 3 in 4 Australians (74%) with a home loan have their mortgage with a Big Four bank, according to APRA’s data from September 2024.
This is despite the fact that leading smaller lenders offer lower home loan rates than the Big Four banks, as evidenced in the Mozo database.
When we asked Aussies why they have their home loan with one of the Big Four, a staggering 40% said they did simply because “I have all my accounts with them”.
Our survey suggests that convenience and familiarity play a large part in how we choose our home loan lender, rather than weighing up the costs and benefits of one provider over another.
But doing this may actually be hurting us in the long run, as choosing a Big Four bank can lead to paying more in interest over time.
According to our database, the Big Four banks have higher average variable interest rates compared to what’s advertised by non-Big Four lenders.
For example, the average variable interest rate advertised among the Big Four banks is 7.15%* for those who have a loan-to-value ratio (LVR) of 80%.
But when we look to non-Big Four lenders, the average variable advertised rate is 6.71%* for those with an LVR of 80%, which is 44 basis points lower.
While this might not sound like a significant difference, it means that a borrower with an average variable Big Four rate could save $140 each month by switching to the average variable rate of a non-Big Four.
*Source: Mozo.com.au product database as at 7th December 2024, based on owner occupier principal & interest fixed rate home loans at $500,000, 80% LVR. Average rates for Big Four providers, all providers and non-Big Four providers.
When you refinance your home loan, you switch from one mortgage to another. It can involve negotiating a better rate with your current lender or swapping to a new provider altogether.
Refinancing can be an effective way to secure a lower interest rate, but more than half (57%) of respondents in Mozo’s survey who had a home loan said they had never refinanced.
This is quite a significant amount when we consider how long respondents have held their mortgages for. Among those surveyed, 22% had been paying off their home loan for more than 10 years. Meanwhile, approximately 1 in 5 respondents (20%) had been making repayments for 10 years or less.
There are costs involved with refinancing a home loan, however, it can be worth switching to a lower interest rate to potentially save you thousands in the long run.
If you want to secure a lower home loan interest rate, you can also try to negotiate with your current lender.
“The Big Four banks will often be prepared to negotiate their rates to win or retain customers,” says Marshall.
“Many people have a preference for banking with big names that they know and are comfortable with, but that means those banks can charge higher rates with the knowledge that most will not try to argue them down.
“Therefore, they might only have to give up some of their interest rate margins for those few customers who take the time to challenge their pricing.”
The Reserve Bank of Australia (RBA) increased the cash rate by 425 basis points (4.25%) between May 2022 and December 2023.
Just prior to the beginning of this rate hiking cycle, the RBA reported the average owner-occupied home loan had an interest rate of 2.60% p.a.
Theoretically, the current average rate would be sitting at 6.85% p.a. following the cash rate increases (and assuming all increases were passed on).
So how might the rate hikes be impacting our finances?
To put it into context, those with a $500,000 home loan who are now making repayments at 6.85% p.a. are paying $1,218 more each month than they would have if their rate was at 2.60% p.a.
Against this backdrop of interest rate rises and high inflation, we asked respondents how they were feeling about their finances.
According to our survey, those who know their interest rate have a 17% higher average monthly income (after tax) than those who don’t.
This could be because financial jargon is complex, and a lack of understanding about interest rates and how they work can result in lower income earners spending more on their mortgage than they need to – potentially becoming more economically disadvantaged.
It’s important to remember that finance is not just for the rich, and there are real benefits to understanding more about your money.
Knowing your interest rate empowers you to know when it’s time to refinance your mortgage, which in turn can free up some of your money, and perhaps even pay off your home loan faster.
Despite cost of living pressures, when we asked Australians that are paying off a mortgage how often they compare home loans, a surprising amount reported they either rarely or had never compared.
Just over 2 in 5 respondents (43%) in our survey said they “rarely” or had “never compared” their loan to others in the market.
Mozo’s analysis found two factors that could be leading us to spend more on our mortgages.
We identified a soft trend up in the average home loan interest rates of our respondents as the frequency of checking our home loan against others in the market decreases.
For example, those surveyed who compare home loans annually had an average variable interest rate of 5.78%. On the other hand, those who reported rarely or never comparing had a variable rate of 6.46% on average.
The average interest rates of those who compare annually (5.78%) versus those who compare rarely or never (6.46%) might not seem that stark on the surface, but the savings can be significant over the long term.
On a $500,000 loan, switching from an interest rate of 6.46% to 5.78% can save you $209 a month in repayments, which shakes out to be $62,684 saved over a 25-year term.
The savings are even greater when we apply them to a $750,000 loan balance. Swapping from a 6.46% interest rate to a lower 5.78% can equate to $313 saved each month, which adds up to $94,026 saved over 25 years.
Our survey data revealed a striking amount of Australians don’t know their home loan interest rate.
By not knowing this basic information, borrowers put themselves at a serious disadvantage when it comes to not overspending on their mortgage and having control over their finances.
This is compounded by the 43% of respondents who reported they “rarely” or had “never compared” their loan to others in the market, again putting them at risk of spending more on their mortgage than they need to.
Almost half of respondents in our survey also said they feel out of control with their expenses.
For borrowers who are feeling overwhelmed by their finances, Marshall suggests taking action.
“While writing down a budget is not many people’s idea of a good time, it is probably the simplest way to get a grip of how you are travelling and what issues might be coming up,” he says.
“Banks are encouraged to work with customers facing financial hardship to find solutions, and the sooner you have a chat with your bank about an upcoming issue the sooner you can start getting help.”
Mozo surveyed over 2,000 Australians in a nationally representative sample. We asked respondents about their finances and questioned how they interact with a range of financial products, including home loans, credit cards, insurance and super. The survey was conducted in August 2024.
Mozo is one of Australia’s leading financial comparison sites, comparing more than 1,800 products from over 200 banking, insurance, energy and internet providers.
With a team of data experts on hand, Mozo provides industry insights, consumer research statistics and money management tips to major media publications and national broadcast networks.
Mozo is part of Future PLC , the global platform for specialist media that connects millions of people worldwide with their passions.
A key brand in the global Future Wealth portfolio, Mozo has been recognised in Australia for simplifying the money maze with award-winning calculators and comparison tools, to help Australians make their money count for more.
