Historically low fixed-term interest rates have captured the attention of current and would-be homeowners in Australia but are they all they’re cracked up to be?
The big four have all dropped their five year fixed-term home loans to new lows – Commonwealth Bank of Australia, National Bank of Australia and Westpac all slashed their respective offerings to 4.99 percent, while ANZ is offering an equivalent loan with a rate of 5.49 percent.
But are these low rates the real deal or a great gimmick? Borrowers need to dig a little deeper in order to ensure they’re getting the best home loan deal possible.
Check the right rate
There are actually two rates on a home loan: the advertised rate and the comparison rate.
Borrowers need to observe the comparison rate to gain an accurate sense of how much they’ll really be paying to borrow – whether they’re dealing with one of the big four or opt for a smaller lender.
A comparison rate gives the true cost of a home loan. Unlike the variable or fixed term advertised rate, the comparison rate accounts for the interest rate, as well as associated fees and charges.
A lender who advertises a super-low interest rate then tacks on overwhelming fees and charges won’t be able to disguise their tactics – instead, they have to show complete transparency with their comparison rate.
By Australian law, lenders are required to provide a comparison rate. It’s just one way borrowers can make an informed home loan decision – but it’s not the only factor they should consider.
A great rate – now what?
While the big four’s behaviour is drastic, it’s certainly leading to good outcomes for borrowers.
“The latest salvo in the competition war, this is the first time we’ve seen the big banks move rates under the five percent mark for five year fixed term home loans,” explained Alex Parsons, Ratecity.com.au CEO.
However, it’s important that interest rates aren’t the be-all and end-all of home loan decision making. Borrowers should pay attention to loan terms as well as types, specifically fixed, variable and split rate loans.
Select the right features
Some home loans offer a plethora of features, while others are more bare bones. Those who take out variable rate loans will have more flexibility when it comes to making one-off repayments, while homeowners with fixed term loans may face restrictions or penalty fees in this regard.
A line of credit feature can be incredibly useful, particularly for homeowners who want access to funds to complete home renovations. Some homeowners will want a redraw facility or offset account, while others will sign up with lenders who offer loan holidays, in order to suspend their payments from time to time.
When completing a home loan comparison, look to the right rate, but also check out the features.