According to Glenn Maynard, Director of The Mortgage Store, one of Sydney's leading mortgage brokers, many lenders are marketing low-cost loan features that have questionable benefits for the borrower to attract the attention of customers.
"Homebuyers should be wary of incentive programs and one-off loan features which have been flooding the market of late. The value of taking out a loan with an attractive entry 'gimmick' is dubious as these loans often have high long term costs or restrictions involved," says Glenn Maynard.
"A classic example is non-bank lenders who offer the ability to switch from a variable interest rate to a fixed interest rate at no cost. As most non-bank lenders offer less competitive fixed interest rates than banks, the loan may cost the borrower more if they elect to fix it. The offer of a free switch from a variable to a fixed rate may be used to mask a higher interest rate. To avoid this trap, borrowers should check whether the fixed rate is consistent with others in the market."
"Borrowers need to ask themselves whether they are able to pre-empt the market and move to a fixed interest rate before the rate rise is implemented. Borrowers should check for any restrictions on fixing a loan because some lenders require advanced notice of the intention to fix, which may reduce the chance of beating the interest rate increase," says Glenn Maynard.
"Borrowers should also check how long it will take for the new loan to be implemented and for the fixed rate to be confirmed. This will ensure they are not being fooled by the 'small print' of a free switch option."
In most instances borrowers are better off paying a fee for switching than risk being locked into an uncompetitive fixed interest rate or taking out a loan which is slow to fix when interest rates are on the rise.
Finally borrowers should not be tricked into thinking that a switching option is essential when choosing a loan. As the average life of a home loan is less than 7 years, with most people electing to fix for a period of 3-5 years, the option to switch is, at best, used only once by most homeowners.
When looking for a loan, homebuyers should stick to their guns and follow these golden rules:
- Make interest rate assessment a priority over short term loan entry gimmicks
- Check both fixed and variable interest rates are consistent with others in the market
- Establish the time it will take to switch from a variable to a fixed interest rate, and how soon the new rate is confirmed
- Consider splitting the loan between variable and fixed interest from the outset to avoid the switching dilemma
The Mortgage Store helps homebuyers find the right home loan by conducting a complete assessment of their personal and financial needs before offering any home loan products.
"We discuss the pros and cons of numerous loan types and structures to educate the homebuyer on what is available in the marketplace and what loan features will work best for them," says Glenn.
"Because we're able to access an extensive range of financial products and offer wider home loan choices than traditional lenders, we're able to provide a truly independent home loan assessment."
"Our loan recommendations aren't swayed by the offer of an attention grabbing gimmick. We look to find the most suitable loan which will not only cost the borrower the least amount of money over the longer term but best fit their individual circumstances," says Glenn Maynard.
Concerned you might be paying too much for your home loan? Contact us for free advice.
KB: Q0006
Last Updated: 26 Sep 2006
