Be wary of cleverly marketed mortgages



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June 30, 2011

Borrowers are being urged to take caution when signing up to some home loan interest rate promotions, following the launch of several deals last month.

While the official cash rate remained steady in May and June, five lenders slashed some of their residential mortgage rates by as much as 45 basis points.

Lenders cutting rates included Beirut Hellenic Bank, which trimmed its four-year fixed home loan by 45 basis points to 7.6 percent. Others included AMP Banking, Citibank, Commonwealth Bank and ING Direct, which all cut rates by 10 basis points or more on some products.

Damian Smith, chief executive of RateCity, says lenders are pushing harder to maintain market share, including some of the big four.

“When the Reserve Bank of Australia keeps the lid on the cash rate it’s unusual to see lenders dropping their variable interest rates, so it’s generally good news for borrowers that some lenders are offering discounts,” he says.

Commonwealth Bank‘s move to drop rates is perhaps the most surprising of the bunch, given that it is one of the country’s major four lenders, which collectively hold about 83 percent of the mortgage market. It’s No Fee home loan dropped by 13 basis points to 7.11 percent last month.

Beware clever marketing
While rate cutting is a good thing for competition Smith says borrowers should not assume that these “discounted” products are the cheapest on the market simply because they are mentioned in the media.

“It’s clear that advertising campaigns work. But it doesn’t mean that borrowers will always get the best deal out of promotional home loan offers,” he says.

Take, for instance, the Commonwealth’s discounted No Fee variable home loan with a rate of 7.11 percent. The rate is close to the market average, but there are 126 variable rate loans in the RateCity database with a rate below 7 percent. So it’s not even close to being the cheapest available.

Some of the top rates offered at the moment include the Loans.com.au Dream Loan Express with a rate of just 6.58 percent, Better Options Home Loan’s Advantage Plus Variable for loans under $2 million at 6.59 percent and Mortgageport Management’s Essential at 6.69 percent, to name a few.

For a $300,000 mortgage, by switching from a rate of 7.11 percent to a rate of 6.58 percent could mean you’ll pay around $100 less per month or save $30,000 over 25 years.

“Make sure you compare home loan deals online before jumping into a mortgage as it could really save you in the long run,” Smith says.

 

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