We all know that big banks, in particular, have gone rogue on rates. It was after the GFC, that the funny business began.
In 2013 I set out to catch the big four hoarding and hiking at whim, launching what I named the Interest Integrity Index.
Eight years in, what you overpay if you remain loyal to the big banks has leapt 134 per cent…from $78,948 to $184,831.
That’s now more than twice the average annual wage of $89,000.
Better still, such bonus money would fund retirement four years earlier, according to how much the Association of Superfunds Australia (ASFA) says it costs for a comfortable retirement ($43,901 a year).
Or a Mercedes C 63 S.
I know what I’d choose.
Instead, a huge number of Australians – four in five - hold the biggest cost-culprit, their mortgage, with a big four bank. They effectively throw that money away.
Where you could save the most money
Your home loan is where the interest ‘overtake’ is largest.
My Interest Integrity Index looks at the difference between the big four-average interest rates on mortgages, personal loans and credit cards, and the best interest rate on the market.
This difference is then applied to the average amount of each Aussies’ mortgage, personal loan and credit card debt - to deliver your precise dollar detriment.
The reality is most of us have a loan, mortgage or credit card throughout our lives. Which means the actual dosh you lose to the banks could be many times higher.
Mortgages account for almost all of the $184,831 lost in excess interest, according to the latest reading of the Index.
All but $3,987 in fact.
This is partly because the average mortgage has spiked from $299,700 at the end of 2013 to $453,133 at the end of 2020 (from ABS Lending Indicators).
But research from Mozo, my data partner in the Index, reveals the pricing premium borrowers pay with the big four has leapt from 1.42 percentage points to 2.52 points.
Worse, it’s jumped up from 2.21 points to that 2.52 level just over COVID (between October 2019 and December 2020). That’s around $35,000 extra in 2020 alone.
In 2013, the advertised big four variable home loan was priced 3.41 above the Reserve Bank official cash rate. Today it’s 4.41 (remember the cash rate has crashed down to a never-before-seen 0.1 percent).
However, NAB deserves a special shout out for the past year, as it’s passed on more of the official cuts than any of the other big four.
Even so, you’ll now pay $303,237 on the average advertised interest rate of a big bank, while huge discounting by other lenders means you could part with as little as $122,393 with the cheapest-on-market lender Reduce (for 80 per cent loan-to-value loans).
How much extra you'll pay if you stay – on the average Aussies' debts
Just bear in mind this is a non-bank lender so the loan doesn’t come with a genuine offset account. But Well Home Loans’ product is the lowest-priced that does, and will only cost you $134,372 - a saving of $168,865.
Personal debt interest rates ratchet up
The credit card contribution to the Interest Integrity Index may be far smaller than the mortgage, but the big four average conventional card rate has done nothing but grow while our official rates have plummeted.
It now stands at 18.79 percent against a market average from Mozo’s database of 16.87 percent.
However, the lowest-rate comparable card on the market, G&C Mutual Bank's Low-Rate Visa Credit Card, charges just 7.49 percent.
On the average debt, repaid at $100 a month, that’s a difference of $129.
The reason this is so low when the interest rate differential is so large is that Aussies have been admirably ditching their card debt, in one at least positive outcome of the COVID crisis.
Unfortunately, they’ve been signing up to ubiquitous buy-now-pay-later services at an equal pace.
On the personal loan front, for the average loan size search ($23,000) on Mozo’s website, you could be paying 5.35 per cent with Australian Military Bank’s five-year fix as opposed to 11.17 percent with a big four alternative.
The saving (as opposed to slug) would mount to $3858.
What can you do about it all?
First of all, never pay the interest rate a large lender advertises. Separate research by Mozo has found that the big banks are giving – behind closed doors – an average interest rate discount of 92 basis points (taking the average rate to 3.59 percent)…and possibly more if you negotiate hard.
Don’t miss that you need to be signed up to a home loan package to access any discounts though, for which you’ll typically pay $400 a year.
Also don’t be tricked by the big four bank’s (or any others lender’s) rock-bottom fixed rates. These are designed to get you through the door and migrate you to nose-bleed variable rates.
The very best way to protect yourself and your bottom line is to simply take up the best deals. Surely at the beginning of a new year, a potential extra $185,000 motivates you.