Money

How Interest Rates May Not Matter When You Choose A Mortgage

We’re conditioned to believe that the interest rate is the single most important element to consider when we’re borrowing money to purchase our first home. But is that really the case? No-one wants to pay more interest than they have to, but other factors may influence our decision more than we realise.

Percentages picture from Shutterstock

The monthly meetings of the Reserve Bank to set ‘official’ interest rates are always reported in great detail by the media, which helps fuel our obsession with interest rates. However, what we’ve realised over the past year is that the Reserve Bank rates, while influential, don’t necessarily directly affect the rates actually offered for loans. Repeatedly, we’ve seen the major banks decline to pass on any cuts in the official rate in their own loan rates, or only pass on a portion of that. Even if they do change their rate, that doesn’t have any effect if you’re on a fixed rate loan.

That change in itself suggests that the role of interest rates when we choose a mortgage is more complicated than a simple “I must get the lowest rate at all costs” mentality. One important factor that doesn’t always get the same attention are the non-interest charges associated with buying a home, particularly fees, stamp duty and any homebuyer bonuses offered by state governments.

I was reminded of this yesterday via a press release from mortgage broker Loan Market. Using ABS data from the past year, the firm calculated the growth (or decline) in home loan approvals month on month and year on year across Australia. Despite five rate cuts during the year to November 2012, home loan approvals varied state by state:

State Nov 12 vs Oct 12 Nov 12 vs Nov 11
NSW -2.69% -10.97%
VIC 0.92% 6.08%
QLD -1.05% 8.33%
SA -6.00% -6.55%
WA 1.06% 12.17%
TAS -3.35% -2.60%
NT 2.33% 20.06%
ACT 3.52% 2.80%
Australia -0.54% 0.61%

The underlying influence here in many cases appears to be not interest rates but other buyer bonuses. In NSW, where loan approvals dropped by 11 per cent, the removal of stamp duty concessions for first home buyers appears to have driven a major decline. Conversely, Victoria, which continues to offer deductions, saw growth, though Loan Market’s Paul Smith suggested that this had slowed down recently in anticipation of new concessions being introduced in January 2013.

The reason why a stamp duty concession may influence your decision up front is that you have to pay that money immediately. Your mortgage will operate over a much longer period, which adds a level of abstraction to the interest rate decision.

How important was the interest rate when you arranged your mortgage? Tell us in the comments.

Lifehacker’s weekly Loaded column looks at better ways to manage (and stop worrying about) your money.


Have you subscribed to Lifehacker Australia's email newsletter? You can also follow us on Facebook, Twitter and YouTube.