26 June 2015
Australians have become gluttons for information and entertainment about property, but how much do we really understand about the basics of home loans?
A recent survey from industry super fund-owned bank, ME, found that only 41 per cent of Australians are confident they know enough to have the right home loan for their situation, a statistic which gives cause for concern.
This worsens to a worryingly low rate of 15 per cent for the next generation of home-buyers, aged 18-29 years old.
ME Head of Home Loans, Patrick Nolan said the statistics show many Australians don’t have a thorough understanding of home loans and how they operate.
“We were particularly surprised that older generations of Australians – those who typically have more exposure to home loans – have low levels of home loan literacy. Only 43 per cent of 30 to 49 year olds and 51 per cent of those aged 50 and over were confident with their home loan choices, far lower than anticipated.
“Financial literacy is valuable asset and one of the biggest money savers over time – it pays to be informed.”
Cash rate confusion
Even the most fundamental piece of home loan knowledge – interest rates – has many Aussies baffled. Despite the survey being conducted just days after the last RBA rate cut, 42 per cent of those surveyed couldn’t correctly state the current RBA cash rate. The over 50s were the most knowledgeable with just 28 per cent missing the mark, but almost half (42 per cent) of those aged 30 to 49 and 70 per cent of those aged 18-29 were in the dark about the cash rate.
Additionally, more than a third (37 per cent) of respondents were unsure if the cash rate affected how much homeowners pay back on their mortgage, and a further 10 per cent thought it didn’t have any impact at all. Men were better informed than women, with 46 per cent of females unsure how the cash rate affected repayments, compared to just 28 per cent of men.
Lack of clarity around home loan features
Home loan features was another grey area for many respondents:
Nolan said he’s amazed more Australian’s don’t understand common home loan features that could help them save them money.
“Take offset accounts, which are a savings or transaction account linked to your home loan. The value of the offset account is deducted from your home loan when loan interest is calculated, which can save you many thousands over the life of the loan,” he said.
Misunderstanding around home loan types
Even distinguishing between the different types of home loans was difficult for many people:
“The fact that a large proportion of Australian’s don’t understand the value of fixing a portion of their home loans is a concern − “it’s a great time to lock in record-low home loan rates, so people could be really missing out,” said Nolan.
“Many borrowers are simply not aware they can divide their loan into fixed and variable portions in what is called a ‘split’ loan, which can give borrowers the best of both worlds.”
So how do we educate people about home loans?
“It's a simple case of rolling up your sleeve and getting informed,” added Nolan.
“Do your online research. There are plenty of independent sites like moneysmart.gov.au that give you the basics and can help explain all the jargon. Many lenders also have online calculators to assist you in crunching the numbers.
“Seriously consider seeing an independent expert like an accountant or non-aligned mortgage broker, who can answer all your unanswered questions.
“That way you'll be better able to choose the right loan with the right features. You'll also be able to manage your loan as circumstances change.”
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Note about the survey: Survey conducted via iView Research using an online survey method. Survey completed by >1,000 Australian adults.