Comparison rate ignorance holding borrowers back

There are concerns that low levels of financial literacy could be costing unsuspecting homebuyers, particularly when it comes to spotting hidden fees and charges on their home loan.

A national mortgage survey, commissioned by member-owned financial services provider CUA, has revealed that the vast majority of homebuyers and those looking to refinance their home loan could be missing out on the best value because they don’t know how to compare the true cost of different loans.

CUA’s Andy Rigg says it’s a concern that fewer than one in three Australians (29 per cent) understand what is meant by a home loan “comparison rate”.

Lenders are required to disclose the comparison rate so homeowners can compare lenders on an even playing field by seeing what the actual cost of their loan will be, including fees, rather than just the annual percentage rate.

Property buyers need to be careful that what looks like a very low rate doesn’t actually have lots of nasty hidden fees and charges,” Rigg says.

Comparison rates are useful in helping property owners choose the most suitable rate for existing and new homeowners by looking behind the headline interest rate to also factor in fees and charges.”

More than 1000 Australians aged from 25 to 49 were surveyed during July, with half of the respondents currently holding a mortgage.

Results revealed that 43 per cent of people misunderstood what was meant by a comparison rate and a further 28 per cent admitted they didn’t know what was meant by a comparison rate.

The findings come at a time when more Aussie homeowners are considering switching their mortgage to lock in some of the lowest interest rates on record.

Forty-seven per cent of mortgage holders surveyed were planning to switch to a fixed rate at some stage in the future, up from just 37 per cent at the start of the year.

Of those planning to fix, around one in three said they were planning to do so in the next six months.

The current low-interest rate environment is clearly encouraging some homeowners to consider locking in these lower mortgage repayments for the next few years. This could be because they’re chasing greater certainty, want to pay their loan off more quickly or may be hoping to divert extra savings to other investments,” Rigg says.

However, it’s also clear that many homeowners are still watching and waiting to see if rates fall to even lower levels, before deciding whether to switch from a variable to fixed-rate loan.”

Despite the historically low interest rates, the survey also found the majority of Australians without a mortgage don’t expect to ever be able to own their own home and fear they’ll be permanently locked out of the housing market if prices keep rising.

The survey showed 33 per cent of non-mortgage holders did not think they could ever afford to buy a property, while a further 39 per cent of respondents feared they’d be priced out of the market unless property prices stay the same or decrease.

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