… they determine the cost of your loan and what you pay back. Even a small difference in rates can make a big difference to repayments.
But sometimes what appears to be the ‘cheapest’ rate isn’t always right for your circumstances.
Given Australian banks and mortgage insurers have specific criteria they use to assess loan applications, if your situation falls outside their guidelines it can be expensive getting your application approved. For example, if you want to borrow 80 per cent or more of the loan price, mortgage insurance will apply and the cost can vary dramatically between lenders. By shopping around a borrower can save as much as $2000 on a loan size of $600,000.
Next there are many types of interest rates: variable, fixed, split, introductory, principal and interest or investment-only each with their own advantages and disadvantages.
So you can see it takes a lot of work to sift through different loans and lenders to secure the best deal.
The devil is always in the detail. You need to know what you’re looking for to avoid getting caught in ”discounted” loan traps.
Don’t be dazzled by honeymoon rates. As the name suggests, they run for 12 months to two years but the life of your loan can last up to 30. To put that in perspective, the lender is generally not going to let you get out of the loan at the end of the introductory period without charging a penalty. After all, once they get you in the door, they don’t want to let you go.
Introductory rates take one of two forms: “fixed discount” and ”discounted fixed” rate. The fixed discount is a rate that is variable, but fixed at a certain level or margin below the standard variable rate. During introductory period, this means the discounted rate will move with the market. The discounted fixed rate is a rate fixed for the introductory period of the loan, and won’t move with the market.
Some lenders may also “cap” or limit the amount of extra money you can pay off the loan during the introductory period, which, in turn, may limit the benefit of having the introductory period.
So what should you do to get a clear picture of the best value loan? Compare interest rates, product features, and fees and charges because they can add up to thousands of dollars over the life of your home loan.
Comparison rates – Always compare interest rates, product features, and fees and charges.
|Option||Comparison Rate||Interest Rate||Fees Charges|
|Home Loan “A”||5.00%||4.50%||0.50%|
|Home Loan “B”||4.35%||4.25%||0.10%|
In the example, home loan B will cost less than home loan A, even though home loan A has a lower interest rate. However, ensure the features being offered by each loan suit you.
If that sounds like too much of a hassle, an Allied Investment Group mortgage broker will investigate the comparison rate, which includes the interest rate or weekly repayment amount, plus fees and charges. Best of all they’ll start with policy and analyse which lenders might provide the amount you’re seeking to borrow and match the best interest rate, along with product features and other associated fees and charges. In short, they’ll create a tailored plan that best suits the life of your loan. Contact Allied on 1300 886 149 for more details.
Allied Investment Group specialises in helping clients take control of their finances so they can have more choices, freedom and security in retirement. Call 1300 886 149 to put your plan in place.