Borrowers failing to understand basic home loan features

by Phil McCarroll08 Sep 2016
Brokers may be well served by offering some education to borrowers, with the results of new survey showing a large proportion of Australians don't understand key home loan features.

Conducted by credit union CUA, the National Mortgage Survey, which quizzed more than 1,000 Australians on their knowledge of their home loans, has shown that less than a third of respondents (29%) understood what was meant by a home loan comparison rate.

Of those who don’t have a full understanding of the comparison rate, 43% of people said they misunderstood it, while 28% admitted to having no knowledge.

With lenders being legally required to disclose the comparison rate for their loans, Andy Rigg, CUA chief operating officer member services, said it’s important that borrowers are educated about its meaning.

“As a responsible lender, we have a duty to make sure borrowers understand the tools they have at their disposal to find a home loan that best suits their situation. 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 said.

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

According to the survey, which was carried out in July, brokers should also prepare for an increase in enquiries from borrowers looking to change their current loan arrangements. 

Forty-seven per cent of mortgage holders are currently planning to switch to a fixed rate loan, up from 37% at the beginning of 2016. Of those who were planning to fix their rate, 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 home owners 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 said.

“However, it’s also clear that many home owners 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.”

While interest rates may be at record lows, there is still a large proportion of Australians who believe they are unlikely to ever buy a property.

Of the non-mortgage holders surveyed by CUA, 33% said they believed they would never be able to afford a property, while another 39% say they would only be able to do so if there was no further increase in prices.