How a low-rate mortgage could cost you more - September 2020
By Guest Blogger, Louisa Sanghera, Principal Broker,
One of the first things most borrowers look at when applying for a home loan is the interest rate.
Which is totally understandable – the rate determines how much your repayments are going to be each month. It’s a pretty important part of the equation!
However, it’s not the ONLY part of the equation you need to consider.
Sometimes, going for the loan with the cut-price interest rate can cost you more in the long run. Here are some of the ways it can deceive you:
When the fees and charges are higher
Think of it like Jetstar. Back when we could travel, you had the option of booking a Jetstar flight for $59, but you had to pay for everything from your seat selection to a cup of coffee to carry-on luggage. If you booked with a full service carrier like Virgin Australia or Qantas, all of those inclusions come with the ticket price.
This could mean a flight with Virgin or Qantas is actually the better deal, once you factor in all the fees and charges.
The same applies with home loans.
Let’s say the interest rate on Loan A is 2.69% with a $15 per month account keeping fee. The interest rate on Loan B is 2.75% 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 better 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 stops you from accessing other benefits
Generally, the lowest-priced home loans are what is known as “basic” loans. They come with very few bells and whistles and don’t generally give the borrower access to extra facilities like 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.
This has the impact of helping you pay down your loan sooner (sometimes, we’re talking years sooner).
When you do the analysis on all of the different loans, interest fees, fees and charges, and you compare them with your specific situation, it becomes clear that sometimes, it's the loan with a higher rate that ends up more affordable in the long run.
Having the time (and the expertise) to do this comparison takes a lot of time – which is where an experienced mortgage broker comes into the picture. A broker can take 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.
This is why is also often pays to use a broker rather than going direct to your bank – because sometimes, the best deal for you is not the one they are offering.
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