Buying a new home can be positively stressful. The prospects of getting a bigger space, your own den, a nice patio for a weekend barbie and being closer to your workplace sounds like living the Australian dream. It is tempting to bite on offers from lenders with seemingly affordable fixed rates over long terms. However, it is crucial to be meticulous in weighing your options before falling for these four home loan traps.
1. Fixed rate is better than variable rate
Fixed rates are great for determining repayments due to its predictability. Many might find it useful, although it’s crucial to understand that fix rates can be costlier when market prices go down. With fixed rate, you may incur break fees if making early repayments or refinancing. Discuss with your mortgage broker on possible costs should you make changes in the future.
On the other hand, variable rate home loans has more flexibility despite its fluctuating interest rates. Most variable rate home loan has features like additional repayments, offset account and redraw facility.
Additional repayments may shrink your mortgage faster and you’d still be able to redraw the funds if needed. Having an offset account helps you lower your mortgage’s interest while maintaining access to your funds whenever you need it.
For example, if you take out a $500,000 home loan with a 5% interest rate over 30 years and keep $10,000 in your offset account for the life of your loan, you may be able to save over $33,285.56 in interest.
To have the best of both worlds, halve your loan into fix and variable rates. As a smart borrower, it’s okay to be fussy and ask before signing up with your chosen rate.
2. Loyalty with my bank is rewarding
You may think that loyalty with your bank gives you a break for staying with them. However, a study from the Australian Competition & Consumer Commission (ACCC) states that existing customers tend to pay 0.24% more than new customers. If you’re already aware of this, chances are, you belong to the 35% of Australians who feel that they’re not getting what they deserve.
You don’t need to feel stuck with your current mortgage. What you can do is to compare rates online and try to negotiate your interest rate with your bank. If your bank declines, then you should consider refinancing through a qualified mortgage broker while you’re at it. Brokers are credit experts that has strong negotiating power who can negotiate on your behalf.
3. All lenders are the same
At first glance, it may seem like all lenders are the same when it comes to the usual nuances of getting a home loan. If you compare rates, you may find that other lenders offer features that are better than what you have.
For example, some lenders differ in terms of redraw facility in that they could charge you fees for redrawing. Other lenders may offer you free redraws up to a certain period and for a limited number of times within a year.
“It’s imperative to read the fine print of the terms and condition, disclaimers and what-not so you know what’s in store for you. The nitty-gritties can be easily overlooked, but not for a professional mortgage broker,” Savvy CEO Bill Tsouvalas suggests.
4. The lowest interest rate gets me the right home loan
Advertised rates are not the only thing you need to look for when comparing loans. What you should check for the comparison rate since it includes the interest rate and most of the fees you need to pay such as, but not limited to, application fees and ongoing fees. Knowing a lender’s comparison rate as opposed to being focused on their advertised rate gives you a more accurate picture of how much your loan would truly cost.
If all the jargon becomes complicated, having a mortgage broker could easily explain these terms in simple language.
Author: Bill Tsouvalas is CEO and managing director at Savvy Home Loans, mortgage brokers specialised in refinancing and subprime home loans. He has a been working in the mortgage & asset finance industry for over 10 years. He often writes articles on mortgage, finance, and insurance topics.