Many mortgage holders may be “oblivious” to the fact they have to ask their bank for an upfront interest rate saving, according to consumer group Choice. When interest rates go up, banks automatically reset repayment levels higher. But when rates come down, borrowers need to contact their bank to instruct them to reduce repayments.”You have to notify them for the [repayment] rates to fall, otherwise they keep charging it at the old rate,” a spokesman for Choice, Christopher Zinn, said. But with the economic outlook more clouded than usual, an increasing number of borrowers are actively choosing to forego the full interest rate cut, instead leaving repayments where they are and paying off the principal of their loan faster.
A spokeswoman for St George, Lara Daniels, said the bank had not been inundated with calls from customers wanting the full reduction in repayments: “Anecdotally, we have heard that customers are holding off on reducing their repayments, even though rates are dropping.” Mr Zinn said this was wise for people who could afford it. “We recommend people keep up their repayments where they can afford to do so, because that is in their long-term interests.”
However, any widespread movement by borrowers to keep ploughing money into their mortgages, instead of spending their savings, could frustrate the Reserve Bank’s efforts to stimulate the economy. The chief executive of the Mortgage and Finance Association of Australia, Phil Naylor, said up to three-quarters of all mortgage holders preferred to make repayments in excess of the minimum required. “Unless they are experiencing financial difficulty, mortgage holders prefer to continue making higher loan repayments so they can pay off their debt sooner rather than later,” he said.
Source: Sydney Morning Herald (3 December 2008)