Tag Archives: interest rate

Are home loans just about interest rates?

Home Buyer Central, , ,

“All home owners should be paying less interest on their home loans”.

That is very obvious, isn’t it?

When you are looking to buy a property and get a home loan, what is the first thing that pops in your mind? I bet it is something along the lines of “I want the lowest interest rate in the market and I don’t care who gives it to me. I will go the person, bank or whoever gives it to me”.

Now, wait a minute – is interest rate the only important factor when you are looking to buy a house?

Let me ask you a few other questions.

1. When you are looking to use the services of a specialist doctor, do you go to the cheapest or the best in the world?

2. When you are wanting to celebrate your anniversary or birthday, do you go to the cheapest restaurant or the one that provides you with quality food and service?

3. When you buy grocery, do you spend less money to buy slightly old food or pay the price to buy good quality food to feed your family?

Of course, there are always arguments that some places have specials and so on.

How is it that when it comes to the biggest debt of your life – your home loan – all you can think about is interest rate? I’m sure most of you are internet savvy and have spent hours looking for all that you could learn about home loans.

I am not sure if the banks want you to understand about other important features of home loans. One example is their other fees – like application fees, valuation fees, settlement fees, exit fees, mortgage insurance amongst other factors like understanding your goals, service, timeframes and what is not working with that particular bank right now! No, they never speak about any of that. Because if they do, then consumers (You) will go away to someone else who offers a comparably suitable product for you.

Home loan service

Unlike them, it is our job as mortgage brokers (at least the good ones) to do our due diligence by asking the right questions to find you the right home loan. Personally, for me, it is all about understanding your goals – what you want in the next few years – how do you want your lifestyle to be – before I can even talk about lenders, let alone interest rates.

Don’t get wrong here! I don’t want you to pay high interest rate and low fees because it beats the purpose. All I am trying to say is that service – talking to one person over the time of the home loan, someone who will consider your goals and needs and wants, year after year is as important as finding the right home loan. Walking into a branch or using online homeloan providers may not be the solution unless you know what you want!

I’d love to hear your thoughts contradicting me!

Fixed rates vs Variable rates – pros and cons

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Houses

 

Fixed rates are at an all time historic low and it could be a good time to consider three to five year fixed rates.

But have you always wondered what the pros and cons are of choosing fixed rates over variable rates or vice versa? Here are some considerations for you..

Fixed rates – pros

  • You know exactly how much your weekly, fortnightly, monthly repayments will be for the term of the fixed rate and hence budgeting is easier.
  • When fixed interest rates are low, it makes it favourable.

Fixed rates – cons

  • Break costs can be very high – if you want to pay off your loan or move banks, you may end up paying thousands of dollars.
  • There is a limit on how much extra you can contribute during fixed term. Some banks allow $10,000 extra contribution per year (during the fixed term) and some may allow $30,000 during fixed term. This depends on the bank and you need to check it with your lender or your broker.
  • Offset account is usually not a fully offset account – some banks allow partial offset. So, if you have a lot of surplus cash, fixed rates may not be the right loan. One way to overcome this is to have a split loan with variable and fixed interest rate loans.
  • Banks usually will not let you redraw the extra amount you have contributed into your fixed rate loan.
  • Fixed Interest rate without a package are generally expensive. So, even if you have an offset account and pay the annual package fee, you may not be allowed to offset too much surplus cash!

If you think you may want to redraw or contribute extra surplus cash or extract equity, but still want to enjoy the benefits of the low fixed interest rate, it is still possible! We can show you how it can be structured for your benefit.

When you consider fixed rates, you have an option to rate lock the fixed interest rate by paying fees (generally, pay 0.15% of the loan amount) to lock the rate for up to 90 days. This is possible only once you have found a property and signed a contract of sale. Banks will not let you rate lock for pre-approvals. If you decide not  to pay the fee, your fixed interest rate will be as on the day of settlement.

Variable rate – pros

  • As the interest rates go up or down, so will your interest rate – minus the interest rate discount you were entitled to when you originally signed up.
  • You can usually make unlimited additional repayments without a penalty – either directly into your home loan or into your offset account.
  • You have access to the surplus funds deposited into the home loan as redraw.
  • You have an option to move banks or even discharge your loan when you choose variable rate without incurring a heavy penalty.

Variable rate – cons

  • When interest rates sky rocket, you may regret not fixing your loan for a lower interest rate!

While you do have the choice to change from one to the other, before you choose an option you need to understand the pros and cons of each and also the fees involved. To switch from a variable rate to a fixed rate might only cost you a small variation fee, whereas to move from a fixed rate to a variable rate can cost you thousands depending on the balance of the loan term.