Seeing a great profile on an internet dating site can have a lot of similarities to a very enticing home loan interest rate ad. The best advice might just be to take a deep breath and proceed with caution.
My friend once saw the perfect girl on a dating website. He knew she was perfect, because she had a fun profile and a great smile.
The only thing was, she was looking for someone aged 30-35, and he was 41. Also, she was looking for someone who leaned one way politically when he actually leaned the other.
So it didn’t matter that he thought she was perfect: she was probably never going to date him because he didn’t meet her criteria.
To cheer him up, I then pointed out that she had her own drawbacks. He was looking for someone who wanted to have children, but she didn’t. Also, he was looking for someone who lived within 10 kilometres, when she was 25 kilometres away.
So although she looked great on the surface, there was actually a whole heap of reasons why they just wouldn’t be a perfect match.
Wouldn’t you know it, interest rate ads are a lot like dating profiles.
The moment you lay eyes on that deliciously low mortgage rate, you start thinking about how much lower it is than your current rate. You start to picture how much you might be able to save. Lower repayments, extra cash each month, it is all starting to sound so good that you almost want to jump in and apply straight away.
But, could the rate ad be too good to be true or, once you uncover the details not be your cup of tea at all? So where do you start.
Work out what type of loan it is and whether it is going to suit you.
Look at the ad in detail and reading the fine print at the bottom. You will get more of an idea of what type of loan you are dealing with. Sometimes there is not a lot of detail on the ad itself. If this happens, you may have go to the website to look at loan product page to find out more. Even then you may have to call the lender to get answers to all your questions.
Is it a variable fixed or intro rate?
Variable rates will often just have a percentage per annum or p.a. and “variable” near the rate. They usually either come with an annual fee or no ongoing fees.
The easiest way to spot which one is by looking at the comparison rate newarby. If the comparison rate is significantly higher, say by 20 to 30 percentage points, then this usually indicates that it comes with an annual fee. If the interest rate and comparison rate are the same or only separated by a few percentage points then potentially there may no fees or only be setup fees to pay.
A fixed rate will say “fixed” with how long it is fixed for, usually from 1 to 5 years. Fixing your rate is a big decision and should not be entered into without weighing up the consequences. What do you think will happen with interest rates in the future? What if variable rates fall and I am stuck with a higher rate than what everyone else is paying (without paying break costs to get me out)? Do I have plans for the property and am I looking to sell sometime soon? Do I want to pay extra and if so am I able to? What is the variable rate that the loan reverts to at the end? Is it competitive or will I need to refinance at the end to get a good rate?
Intro rate loans are not as common these days but still appear from time to time. This is where the super low variable rate stays low for a period of time. Usually it’s about a year or two, before it increases back to a higher ongoing rate. An intro rate will list the rate with “variable” and a number of years like “2 year variable rate”. The big questions is, how much are you going to save in the two years it is super low and how competitive is the ongoing rate you will land at the end of the intro rate term.
What features does the loan come with?
Lenders are pretty good at listing the features that loans come with. What is not so obvious is what they don’t come with, so you will need to do some more digging around to find this out. Have a think about the sort of things you have with your current loan. Use this as a starting point to work out if it is going to be similar.
Does it come with an offset account or are you able to pay extra and redraw for free? Can you pay extra without penalty and can you choose your repayment frequency like weekly, fortnightly or monthly? Do they have good internet banking facilities and how do you physically access your redraw? Can you deposit extra funds into the loan via a funds transfer or by visiting a branch? Do they have a user friendly Mobile App?
Are there fees involved?
Check out what it is going to cost to setup the loan. This may or may not be listed, or be written a little ambiguously, like “no application fee”. Other items are listed “at cost” like valuation, processing fee and lender legal fees.
What ongoing fees will you be paying? Is there an annual or monthly fee? Is there a fee to change to a competitive variable rate at the end of the fixed or intro period? Are there fees to access redraw? Are there any other fees that you will likely be paying on a regular basis?
Do I qualify?
Does all of the above is starting to stack up OK? The next questions to ask is, if you apply will you qualify?
Most home loan ads have listed in the fine print “subject to lending criteria”. This is just a blanket statement to show that they are not being misleading. Especially when they know that some people or loan scenarios won’t qualify.
Here’s the reality: Interest rate mean nothing if you don’t meet the lending criteria.
Lending criteria can refer to basic loan details for example:
- minimum and maximum loan amounts like $150k to $500k,
- how much equity you have for example borrowings under 80% of the value of the property,
- the type of security like owner occupied or investment) or
- type of repayments like principal and interest or interest only.
These can usually be found quite easily by looking at the loan product details or talking to the lender.
The more difficult thing to ascertain with lending criteria are the rules in the background as to what the lender will or will not accept. These are contained in large lending policy documents which are not disclosed or shared with borrowers. It is the sort of thing you might only find out when your application is declined. This can be a real shock if you are pretty sure that you are the perfect candidate.
It can include things like how long you have been in your current job. Other things might be have you changed jobs or industries lately. Do you have any adverse listings on your credit file and how many credit enquiries are considered OK. What type of security property is it and is it located in an acceptable postcode? Do you have any hiccups in your repayment history, even if these can be explained. And the list goes on and on.
To work out if you qualify you will need to have a very extensive chat to the lender or work with an experienced broker to go through your details. Never apply for a loan until you are pretty certain that everything you can tick off upfront is OK.
Applying without doing this can lead to your application being declined and not only wasting your time and effort putting it together but also putting a credit enquiry on your credit file which can impact your credit score in the future.
Lastly, crunch the numbers to see if the new rate will get you ahead in the long run.
Part of your calculations needs to be, will you be financially better off in the long run if you switch loans. Do a couple of scenarios over a few years and work out how much interest you will save each year and then deduct the costs to change over loans and any ongoing fees.
Don’t forget to factor in all the costs involved like the discharge and legal fees to close your current loan as well as Government registration and transfer fees on the loan and title.
Is it worth changing loans?
There are a lot of things to be considered when you weighing up a new loan with an attractive low interest rate. You may be able to work through this yourself by spending time chatting to the lender or you may call in the help of a mortgage broker to help you.
Whatever you decide ensure that you get the right advice that will put you in a better position in the long run. Find out the motivation of the person you are dealing with and double check that they have your best interests at heart. Would they advise you to stick where you are if that was the right option for you? If in doubt get a second opinion as it will be you that will be stuck with the new lender and new rate long after the lender loan adviser and mortgage broker have moved on.
So is the super low rate the right loan option for you? To say it is an easy question to answer would be as foolish as fixating on Brad Pitt or Angelina Jolie on the dating site: deep down you know it may be too good to be true – and they’d probably be too high-maintenance anyway!
By Peter Ellis
The Borrowers Advocate, Lending Mate™
Peter is a trail blazing campaigner with a vision to put power back into the hands of borrowers. He was disheartened by an industry where home loans were less about the individuals borrowing the money and more about sales targets. Those impacted most were people that didn’t tick all the boxes to fit the ideal profile, who were often being left to fend for themselves.
Lending Mate™ wants to restore this power imbalance and start a movement where borrowers get a fair go. Lending Mate™ is having someone on your side, genuinely working in your interest to enable you to get ahead financially. We aim to provide the information, help and guidance you need to put you back in control.
Disclaimer Statement: Your full financial needs and requirements need to be assessed prior to any offer or acceptance of a loan product.
Lending Mate™ trading as Free From Financial Worries Pty Ltd (ABN 88 134 812 165), Credit Representative number 442518 is an authorised representative of Connective Credit Services Pty Ltd (ABN: 51 143 651 496), Credit License number 389328.