Get more from lower rates

THE latest cut to the official cash rate marks the eighth time rates have dropped in the past two years, and it's giving home owners a valuable chance to get ahead with their mortgage.

Most lenders are passing the full value of the recent 0.25% rate cut on to their mortgage customers. According to comparison site RateCity, a borrower with the average home loan of $300,000 can expect to see a reduction in monthly repayments of $44.

That's welcome news for households battling rising living costs but if your budget allows it, leaving your repayments at the old, pre-rate cut level is a smart strategy.

You'll be making an extra payment on the loan each month without having to adjust your household budget, and it's a proven way to pay off your loan sooner.

However it's possible to enjoy even bigger savings, and it just involves checking to see that you're not paying a higher home loan rate than necessary. If you are, you could be wasting an opportunity to forge ahead with your mortgage.

The vast majority of Australian home owners have their mortgage with one of the big four banks. Yet some of the lowest rates are available through smaller lenders.

As a guide, NAB has announced that it is cutting its standard variable rate to 5.88%. The Commonwealth Bank is charging 5.9%.

And despite having cut its rate by 0.28% - more than the 0.25% reduction in the official cash rate, Westpac's standard variable rate is 5.98%. (Some of the rate cuts are effective from mid-August.)

Some of the smaller lenders are considerably cheaper - in some cases offering rate savings of 1% or more. With for example, you could pay a home loan rate of 4.49%; State Custodians' rate is 4.84% and UBank charges 4.84%.

To be fair, plenty of home owners use a package loan that combines several products and offers an ongoing rate discount.

Westpac's package deal for example features a rate discount of 0.7%. Not all small lenders provide a package option.

Nonetheless, I still reckon it's worth checking the rate you're paying on your mortgage to see how it shapes up. If you've built up a reasonable level of home equity and can avoid paying lenders mortgage insurance, refinancing to a cheaper lender can produce worthwhile savings.

Use those savings to pay a bit extra off the loan and you can really fast track your way to mortgage freedom.
It's important to note that smaller lenders are just as secure as the big banks, and they are required by law to operate under the same prudential guidelines.

Sure, you may not have the benefit of an extensive branch network though online banking means most loan transactions can be completed from just about anywhere you have access to the internet.

Paul Clitheroe is a founding director of financial planning firm ipac, chairman of the Australian Government Financial Literacy Board and chief commentator for Money magazine. Visit for more information.

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