It’s one of the first questions that most borrowers ask me when we’re shopping around for a home loan:
“What’s the cheapest interest rate you can get for me?”
I totally understand the question – the interest rate you pay is going to determine how much your repayments cost you each month. It’s a very important part of the equation!
But sometimes, getting too fixated on the interest rate on offer can be like a game of “smokes and mirrors”.
Yes, you get the cheap rate – but at what cost?
In certain circumstances, going for the loan with the cut-price interest rate can cost more money in the long run.
Here are 3 ways a low-rate loan can deceive you:
When it’s a honeymoon rate
Many banks and lenders can fall into the habit of offering a better deal to new customers than to their existing home loan clients.
It is what’s known as a honeymoon rate and it can be quite deeply discounted compared to other loans on offer.
However, these types of deals usually only last for 12 months – 2 years at the most.
Once the honeymoon rate ends, you’re back on their standard variable rate, which could be even higher than other loans on the market.
Yes, you’ve enjoyed a good discount for the first year of the loan – but what about the next 29 years?
When it is loaded with expensive fees and charges
Sometimes, you get what you pay for.
If you pay for a basic loan, then it will come with basic inclusions. Think of it like Jetstar. Back when we could freely travel, we had the option of booking a Jetstar flight for a low price.
But once you add on $7 for seat selection, $12 for a sandwich and a coffee, $19 to update your carry-on luggage, a package to allow flexible changes and a credit card fee at the end, your fare is suddenly looking quite expensive.
Meanwhile, if you book a flexible fare with a full service carrier like Virgin Australia or Qantas, it might seem more expensive when you compare the initial price – but all of these inclusions come with the ticket price.
The same type of theory applies with home loans.
Let’s say the interest rate on Loan A is 2.7% with a $15 per month account keeping fee. The interest rate on Loan B is 2.8% with a $0 per month account keeping fee.
Depending on the size of your loan, the second option with the higher interest rate could be the less expensive option in the long run.
This is especially the case when you start to make headway with the principal of the loan, and the interest component of your repayment gets smaller and smaller.
When it prevents you from accessing other benefits
Generally the lowest-priced home loans are known as “basic” loans. They come with very few bells and whistles and don’t generally give the borrower access to extra facilities like redraw or offset.
And offset account allows you to “offset” your savings against your mortgage.
If you have $100,000 in savings, for example, and you save that in an offset account against your mortgage, that means you’ll pay no mortgage interest on $100,000 worth of your loan.
Your repayment will stay the same each month (assuming it’s a principal and interest loan) and the money you DON’T spend on interest will be directed towards the principal part of your mortgage – helping you pay the loan off far more quickly.
When you analyse all of the different loans, interest rates and fees and charges on offer, and you compare them against your specific situation, it quickly becomes clear that sometimes, the loan with the cheapest rate isn’t the best deal after all.
Working with experienced mortgage broker can help you by taking into account your income, your expenses and your goals and help you obtain a loan that offers the best deal for your specific situation – so you don’t end up spending more than you need to on your loan repayments. If you’d like a free mortgage health check or you’d like us to check your borrowing power, contact our friendly team today!