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Be wary of cleverly marketed mortgages

Be wary of cleverly marketed mortgages

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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Learn more about home loans

What happens to my home loan when interest rates rise?

If you are on a variable rate home loan, every so often your rate will be subject to increases and decreases. Rate changes are determined by your lender, not the Reserve Bank of Australia, however often when the RBA changes the cash rate, a number of banks will follow suit, at least to some extent. You can use RateCity cash rate to check how the latest interest rate change affected your mortgage interest rate.

When your rate rises, you will be required to pay your bank more each month in mortgage repayments. Similarly, if your interest rate is cut, then your monthly repayments will decrease. Your lender will notify you of what your new repayments will be, although you can do the calculations yourself, and compare other home loan rates using our mortgage calculator.

There is no way of conclusively predicting when interest rates will go up or down on home loans so if you prefer a more stable approach consider opting for a fixed rate loan.

Does the Home Loan Rate Promise apply to discounted interest rate offers, such as honeymoon rates?

No. Temporary discounts to home loan interest rates will expire after a limited time, so they aren’t valid for comparing home loans as part of the Home Loan Rate Promise.

However, if your home loan has been discounted from the lender’s standard rate on a permanent basis, you can check if we can find an even lower rate that could apply to you.

What is a variable home loan?

A variable rate home loan is one where the interest rate can and will change over the course of your loan. The rate is determined by your lender, not the Reserve Bank of Australia, so while the cash rate might go down, your bank may decide not to follow suit, although they do broadly follow market conditions. One of the upsides of variable rates is that they are typically more flexible than their fixed rate counterparts which means that a lot of these products will let you make extra repayments and offer features such as offset accounts.

What is the Home Loan Rate Promise?

The Home Loan Rate Promise is RateCity putting its money where its mouth is. We believe that too many Australians are paying too much for their home loans. We’re so confident we can help Aussies save money, if we can’t beat your current rate, we’ll give you a $100 gift card.*

There are two reasons it pays to check your rate with the Home Loan Rate Promise:

  • You can find out how much you could save on your home loan by switching to a loan with a lower interest rate
  • If we can’t beat your current rate, you can claim a $100 gift card with our Home Loan Rate Promise*