A new survey of homeowners has revealed "concerningly low levels of awareness" about key mortgage terms, with signs financial literacy among Australians is declining
The poll of 1001 people commissioned by Gateway Bank revealed just over half were "definitely aware" of the terms redraw facility, home loan insurance and offset account, scoring 56 per cent, 55 per cent and 53 per cent respectively
Forty per cent of borrowers could say the same for lenders mortgage insurance, 34 per cent for split home loan, while just 31 per cent knew the difference between a comparison rate and an interest rate
Loan-to-value ratio came in at 26 per cent, while the least known term was portability on 20 per cent
"The findings don't surprise us," Gateway Bank chief executive Paul Thomas said. "The average Australian might buy three home loans in their lifetime, that's not a lot
Things change between taking out your first mortgage and another 10 years later." Compared with results of a similar survey carried out in 2017 — albeit with a sample size of just 300 — awareness of all of the terms was lower, with the exception of split home loan
Mr Thomas said it "pays to educate yourself". "If you do your homework and take out the right loan with the right features at the right price, you could well save yourself tens of thousands of dollars over 25 years," he said
"The flip side is if you get it wrong the result could be a horror." The survey also found men were more likely to claim some level of understanding than women each of the terms — but Mr Thomas said in his experience, he had "seen nothing that would suggest to me that women are not at least as financially astute as men"
For those unsure, we asked Mr Thomas to explain what each of the terms means. SPLIT HOME LOAN "A split home loan is the best of both worlds
Some of your loan can be fixed and some can be variable. The benefit of that is, despite what people say no one can predict the future
If you're uncertain, you can say I'm going to take a punt and fix a certain amount and leave half variable
It's just a form of protection." OFFSET ACCOUNT "An offset account is a tremendous feature
Even people who've got a mortgage, most do have some cash lying around. It makes sense rather than having it in a separate savings account where you earn very little interest, to put it in an offset
If you've got a $500,000 loan and you put in an offset account, you're only going to pay interest on $480,000
Over 25 years that's going to add up to a substantial saving of money in your pocket rather than the lender's
" COMPARISON VERSUS INTEREST RATE "This is the single most important thing. It enables an apples-to-apples comparison of interest rates in simple language
It goes back well over 20 years when the government (stepped in because) some credit providers were coming out with what seemed like super-low teaser rates, but they had hidden fees and charges that escalated the cost, so if the borrower had taken out a loan half a per cent more they would have paid less because there were no hidden charges
I say to anyone, the most important thing is to compare one rate to another using the comparison rate
" REDRAW FACILITY "I encourage everyone to have a look at a redraw facility, the vast majority of lenders offer them
If your repayment is $1000 a month, try to pay $1100 a month. That $100 builds up
If you never have to redraw it that's great, you pay your loan off quicker, but if a rainy day comes and you get unexpected bills, after two or three years you may have some thousands of dollars which you can redraw to help pay them
" LENDERS MORTGAGE INSURANCE "This is insurance the borrower pays for that actually covers the credit provider
People might say that's unfair, but in the past banks would not lend you more than 80 per cent of the value of the home
That was fine in the '70s and '80s, but because home prices have risen so much, most Australians don't have a 20 per cent deposit
The innovation was if we can cover our excess risk, more people can get into the market
" PORTABILITY "It's a feature that's been around a while but most people aren't aware of it
We call it security substitution. Say you live in suburb A and want to move to suburb B but don't want to get a new loan, we can simply substitute the security you have on a property for another
In other words, you don't have to come in, get a payout on your existing loan, take a payout and apply for a new loan
It is almost seamless and it's done effortlessly." frank.chung@news.com.au
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