When you’re applying for a new home loan or refinancing your existing mortgage, it makes sense to look for the cheapest possible interest rate.
But looking for the cheapest loan is not always the best strategy.
You must be thinking I’m crazy for suggesting that sometimes, you should pay a higher interest rate – but hear me out!
In my experience as a mortgage broker, I’ve learnt that far too many borrowers focus purely on the interest rate when comparing loans. They do this, rather than focusing on the total balance of borrowing they can achieve.
When does it pay to pay more?
There are some situations when it makes more sense for homebuyers and property investors to opt for the loan that suits them best, rather than the loan that costs the least.
For instance, let’s say you’re refinancing. You’ve had your home loan for five years, and the value has grown from $700,000 when you bought it to $800,000 now. Your loan balance is around $560,000.
You could go with Lender A – their 2-year fixed home loan rate is very low at 2.09%. But they’re only prepared to lender to 75% of the property’s current value, which is $600,000. You can refinance and access $40,000 equity.
The problem? The purpose of refinancing is so you can renovate the kitchen and add a pool. That’s going to cost way more than $40,000.
Fortunately, you have the option of going with Lender B. Their interest rate is higher at 2.35%, but they’re willing to lender you 80% of the property’s value, which is $640,000.
This gives you access to the full $80,000 you need to renovate the kitchen and install a pool, with some money left over to recarpet the bedrooms.
Yes, you are paying a slightly higher interest rate, but in return you’re able to achieve your goals. In this instance, the renovation could potentially add far more value to the home than it cost, which will far outweigh the small amount of extra money spent on interest anyway.
Keep you eye on the end goal
When working out how much to borrow and setting up the right loan structure, the most important thing to consider is your end goal.
That might be getting the cheapest possible interest rate.
Or, it could be refinancing to get the most equity out, so you can use those funds on a renovation or to purchase an investment property.
Or, it might be borrowing the absolute maximum amount you can borrow, so you can leverage that money further as an investor.
Or, it could even be locking in a super-low fixed interest rate, so you have peace of mind that your repayments will be low for the next few years?
Everyone’s needs are different, which is why the right lending solution for you is so personal. There are risks and rewards of each strategy, and by working with a mortgage broker, you can talk through the benefits and drawbacks of each different scenario, so you can make the best decision to suit you.
We’re seeing many borrowers take advantage of current lending conditions; with interest rates this low, there’s never been a better time to compare your loan and make sure you’re getting the best possible deal.
In recent weeks we’ve started to see some lenders increase their fixed rate loans, which indicates they might have reached their floor. If you’re considering refinancing to a fixed-rate home loan, give us a ring for a chat, so you can see if you can save yourself some money with a better deal on your mortgage.
This article contains information that is general in nature. It does not take into account the objectives, financial situation or needs of any particular person. You need to consider your financial situation and needs before making any decisions based on this information.