Date issued: 7 August 2007

New research into home-buyers has found that almost one in four Australians didn't know the interest rate they would pay when they took out their loan; the older that buyers are, the less concerned they are about interest rates; and many buyers are under the misconception they are not paying extra for features of their loan.

The study, commissioned by CPA Australia, found homebuyers were disturbingly uninformed, according to the organisation's Financial Planning Policy Adviser, Kath Bowler CPA.

'Considering that the increasing cost of housing is making the Aussie dream of owning your own home harder to turn into reality for many people, it is almost as if people are turning a blind eye to the cost when choosing a home loan,' she said.

Bowler says the research results are surprising considering public anxiety about a potential interest rate rise.

'Over half of the respondents indicated they aren't exactly sure what current interest they are paying on their home loan. Even small changes to the rate can have a significant impact to their repayments,' she said.

The research found that borrowers were more concerned about the relationship they have with their lender than the interest rate they are charged. 43 per cent of respondents claimed existing or past relationships as the primary reason for their choice, with fees and charges second.

Middle-aged and older buyers were found to be less concerned by interest rates than younger buyers when taking out a mortgage. Over half of those interviewed under 35 years of age said monetary aspects such as competitive rates motivated their choice of mortgage product, compared with 27 per cent for those aged over 40.

A large majority (70 per cent) of respondents expected to pay off their mortgage early, with mortgage features such as redraw, offset or all-in-one accounts being key components of this strategy. More than half (54 per cent) chose a mortgage product with these facilities on the basis they would help them pay off the loan faster.

Of those surveyed, 86 per cent claimed to have features attached to their loan and more than half said they are not being charged extra for these features.

However, after examining interest rate data from the six major banks, Mamta Grewal, from financial services research group CANNEX, advised that these services do cost more.

'On average, mortgagors are paying 0.67 per cent more to have an offset facility and 0.68 per cent more to have a line of credit,' Ms Grewal says. 'That's equivalent to over $34,000 extra you will pay on a $250,000 loan over 25 years.'

Bowler urges borrowers to ask about any extra costs and to beware of the traps connected to redraw and offset facilities if they have these.

'Redraws aren't always a fast track to financial freedom. In fact, 64 per cent of those interviewed admitted they have used their redraw, offset or all-in-one account for personal reasons,' says Bowler.

'There's a risk that these facilities can turn into a residential ATM, with mortgagors constantly withdrawing the excess money to fund personal expenses, rather to pay off their loan faster.'

Editor's note: CPA Australia Financial Planning Policy Adviser, Kath Bowler CPA, is available for interviews.

Key points: Trends and issues in current mortgages research

Mortgages generally

• 24 per cent of respondents did not know exactly what the interest rate was when they took out their loan
• Less than half (44 per cent) are currently exactly aware of what their interest rate is
• 52 per cent of respondents claim there are definitely not being charged a higher interest rate in order to have a redraw, offset or all in one facility attached to their mortgage
• 69 per cent are regularly making additional mortgage repayments over and above the minimum required, (but only half of those indicated they are increasing their redraw or offset balances)  
• existing or past relationships were the number one reason given for selecting a current mortgage (43 per cent), with fees and rates following as the second most popular reason (35 per cent) 
• a notable minority of mortgagors (16 per cent) estimated that they borrowed between 91 and 100 per cent of the property value at the time they took it out

Offset and redraw facilities

• 86 per cent of respondents had either a redraw facility, offset account or all in one account attached to their mortgage
• the main reason given for having these facilities was to have access to funds in an emergency (72 per cent), yet only 26 per cent of respondents had actually used the funds for this purpose
• over half of respondents (54 per cent) have indicated they have a redraw facility so they can pay their loan off faster and 69 per cent are regularly making additional mortgage repayments; however, only half of those surveyed have actually increased their redraw facility
• 64 per cent have used their redraw, offset or all in one for personal reasons, such as to buy personal goods or services, go on a holiday or pay for renovations

Use of brokers

• 27 per cent of those surveyed used a broker to source their current mortgage - for those aged under 35, this number increases dramatically, with half of those surveyed under 35 using a broker
• where people were having difficulty sourcing a mortgage, there were also more likely to use a broker, with 38 per cent of those surveyed using a broker (the average being 27 per cent)
• mortgagors were almost unanimous (94 per cent) about agreeing that 'getting good advice is critical when selecting a mortgage'
• the average mortgage taken out was 70 per cent of the original value of the property; however, for those that used a broker, they borrowed nearly 80 per cent of the property value
• despite the increasing trend towards brokers, existing relationships with lenders and bank are still very important, with  43 per cent of respondents selected their product because of existing relationships. Those aged 55+ were the most likely to have pointed to an existing relationship as the reason for taking out their mortgage (48 per cent, compared with 26 per cent for younger mortgagors)  

Note: The research was undertaken by Insight Compass between May and June 2007. 312 individual mortgagors participated in the research across Australia with a minimum of 45 interviews conducted by phone in each state.

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