Did you know that one of the largest trigger points for people either getting a home loan or refinancing is an interest rate advert. You know the ones. You’ll see them on TV, online or in shop windows and you’ll probably have that “oh shit” moment where you think you could get a good deal or might be paying too much. You’ll then head to google for some research, maybe chat to a few friends, go to your bank and either decide to make a change or just put it in the too hard basket.
I’ll be the first to admit that this form of advertising does the job and generally motivates some sort of action but before you make your selection check if the offer is more than meets the eyes (pardon the transformers reference).
To begin with it is a legal requirement for interest rate adverts to include comparison rates along with warning notes and terms and conditions that you’ll probably never read (I think the point of the 100 plus pages of disclosure documents is actually design to bore you into not reading them). It is designed to help the borrower understand the total cost of the loan including fees but in doing so it applies certain principles that may not actually apply to you. While this is a good starting point, I look at things a little differently and can hopefully help you be better prepared the next time you shop around.
Firstly, change your time horizon from 30 years to 4 years. Whether you like it or not 4 years is actually the average life of a home loan and it's getting shorter. That is generally the time it takes for you to either buy a new home, sell it for a change or just generally get pissed off with your bank/broker enough to refinance elsewhere.
Secondly, factor in fees. I mean all the fees that impact your ability to open, hold and close the loan. A low rate loan with high fees may cost you more than your think.
Thirdly, include the value of bonuses like cashbacks and rewards if there is one. Essentially a $1,000 cashback can represent a discount of 0.25% on your interest rate in the first year, this obviously depends on your loan size but for this example I used $400,000.
Fourthly, consider packages that give you credit cards, transaction accounts and so on but have a look around to see if you can create your own package for cheaper. Remember, this line of products like all others were created with profitability in mind. Transaction accounts are far more valuable to banks then you would expect.
Finally, when you have done enough digging around see how your repayments stack up with reference to the above. You’ll be surprised. In some cases introductory rate products will provide you with larger savings relative to lifetime discount products which are partly designed by banks to keep you in their portfolio longer.
If all the above seems too much to deal with come and speak to us at Beyond Broking. This approach is just a small part of what we do but it all adds to helping you get the most suitable home loan. It is also worth noting that not all bank lenders or brokers will apply this approach but it is just something I have learned after spending years in the industry. Questions and feedback welcome at firstname.lastname@example.org.