How do people choose a mortgage?

Date: August 8, 2007
Publication: Sydney Morning Herald

A report by accounting body CPA Australia also shows that almost one in four homebuyers didn't know what the interest rate was when they took out their loan.

Kath Bowler, CPA's Financial Planning Policy Adviser, says the study found that homebuyers were "disturbingly uninformed".

"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.

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

"Even small changes to the rate can have a significant impact on their repayments," she said.

The Reserve Bank of Australia is expected to lift interest rates tomorrow for the first time since November, increasing its cash rate to 6.5 per cent from 6.25 per cent, which would see the rate for standard variable mortgages upped to 8.3 per cent from 8.05 per cent.

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

Still, over half of the respondents under 35 years old said monetary aspects, such as competitive rates, motivated their choice of mortgage product, compared with 27 per cent for those aged over 40.

Seventy per cent of respondents expect to pay off their mortgage early, while 54 per cent chose a mortgage product with features such as redraw, offset or all-in-one accounts on the basis they would help them pay off the loan faster.

"Redraws aren't always a fast track to financial freedom," Ms Bowler said.

"In fact, 64 per cent of those interviewed admitted they have used their redraw, offset or all-in-one account for personal reasons.

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

And of the 86 per cent who said they had these mortgage features attached to their loan, more than half said they are not being charged extra for these services.

However, interest rate data from the six major banks compiled by consumer financial products researcher CANNEX showed these facilities do cost more.

"On average, mortgagees are paying 0.67 per cent more to have an offset facility and 0.68 per cent more to have a line of credit," Mamta Grewal, from the CANNEX research group, says.

"That's equivalent to over $34,000 extra you will pay on a $250,000 loan over 25 years."

SOURCE: AAP