Is the cheapest home loan always the best?

Is the cheapest home loan always the best?

We all want to pay as little for our mortgage as possible, but it would be wrong to assume that lower-rate products are automatically better.

In some ways, a home loan is like a meal or a car or a pair of shoes – the cheapest isn’t always the best.

Here are five reasons why the product with the lowest rate might not be all it’s cracked up to be.

The lowest rate might not be the lowest rate

Lenders like to entice customers with what is called a ‘honeymoon rate’ – an artificially low rate that soon reverts to the higher ‘real’ rate.

For example, a lender might offer a discount of 0.50 percentage points to lure in the borrower, but then move them to the real rate six months into the mortgage.

Hidden costs can be surprisingly high

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Another reason the headline interest rate might be misleading is that you could end up paying significantly more than you expected once fees and charges have been added on.

That’s why borrowers should check not just the headline rate but also the ‘comparison rate’, which also incorporates fees and charges. Sometimes, the comparison rate can be more than 1 percentage point higher than the headline rate.

Cheap products are often cheap for a reason

Ultra-low mortgage products are often no-frills products, so even if they really are as cheap as they look, they might be missing desirable features.

For example, you might want access to an offset account or redraw facility, or you might want the option of temporarily reducing or freezing your repayments – all of which might be absent.

As a result, you might be better off choosing a mortgage that has a higher rate but offers you more control.

You might be denied branch access

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Another reason some lenders are able to offer such low rates is because they don’t have to fund expensive branch networks – either because they have just a few branches or because they’re online-only operations.

But what if you want the security of always having a branch on hand? In that case, you might want to choose an alternative lender, even if it means paying a little bit more.

Pricier fixed rates might be a better option

Ultra-low variable rates are all well and good, but what if you expect interest rates to increase or you need certainty so you can better manage your finances?

Again, you might feel more comfortable opting for a pricier fixed-rate mortgage.

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Learn more about home loans

What is the average annual percentage rate?

Also known as the comparison rate, or sometimes the ‘true rate’ of a loan, the average annual percentage rate (AAPR) is used to indicate the overall cost of a loan after considering all the fees, charges and other factors, such as introductory offers and honeymoon rates.

The AAPR is calculated based on a standardised loan amount and loan term, and doesn’t include any extra non-standard charges.

How common are low-deposit home loans?

Low-deposit home loans aren’t as common as they once were, because they’re regarded as relatively risky and the banking regulator (APRA) is trying to reduce risk from the mortgage market.

However, if you do your research, you’ll find there is still a fairly wide selection of banks, credit unions and non-bank lenders that offers low-deposit home loans.

What is the amortisation period?

Popularly known as the loan term, the amortisation period is the time over which the borrower must pay back both the loan’s principal and interest. It is usually determined during the application approval process.

What does going guarantor' mean?

Going guarantor means a person offers up the equity in their home as security for your loan. This is a serious commitment which can have major repercussions if the person is not able to make their repayments and defaults on their loan. In this scenario, the bank will legally be able to the guarantor until the debt is settled.

Not everyone can be a guarantor. Lenders will generally only allow immediate family members to act as a guarantor but this can sometimes be stretched to include extended family depending on the circumstances.

What factors does Real Time Ratings consider?

Real Time RatingsTM uses a range of information to provide personalised results:

  • Your loan amount
  • Your borrowing status (whether you are an owner-occupier or an investor)
  • Your loan-to-value ratio (LVR)
  • Your personal preferences (such as whether you want an offset account or to be able to make extra repayments)
  • Product information (such as a loan’s interest rate, fees and LVR requirements)
  • Market changes (such as when new loans come on to the market)

Does each product always have the same rating?

No, the rating you see depends on a number of factors and can change as you tell us more about your loan profile and preferences. The reasons you may see a different rating:

  • Lenders have made changes. Our ratings show the relative competitiveness of all the products listed at a given time. As the listing change, so do the ratings.
  • You have updated you profile. If you increase your loan amount, the impact of different rates and fees will change which loans are the lowest cost for you.
  • You adjust your preferences. The more you search for flexible loan features, the more importance we assign to the Flexibility Score. You can also adjust your Flexibility Weighting yourself, which will recalculate the ratings with preference given to more flexible loans.

How is the flexibility score calculated?

Points are awarded for different features. More important features get more points. The points are then added up and indexed into a score from 0 to 5.

What is breach of contract?

A failure to follow all or part of a contract or breaking the conditions of a contract without any legal excuse. A breach of contract can be material, minor, actual or anticipatory, depending on the severity of the breaches and their material impact.

What is appreciation or depreciation of property?

The increase or decrease in the value of a property due to factors including inflation, demand and political stability.

Mortgage Calculator, Loan Results

These are the loans that may be suitable, based on your pre-selected criteria. 

Mortgage Balance

The amount you currently owe your mortgage lender. If you are not sure, enter your best estimate.

What is a fixed home loan?

A fixed rate home loan is a loan where the interest rate is set for a certain amount of time, usually between one and 15 years. The advantage of a fixed rate is that you know exactly how much your repayments will be for the duration of the fixed term. There are some disadvantages to fixing that you need to be aware of. Some products won’t let you make extra repayments, or offer tools such as an offset account to help you reduce your interest, while others will charge a significant break fee if you decide to terminate the loan before the fixed period finishes.

Mortgage Calculator, Loan Purpose

This is what you will use the loan for – i.e. investment. 

How personalised is my rating?

Real Time Ratings produces instant scores for loan products and updates them based what you tell us about what you’re looking for in a loan. In that sense, we believe the ratings are as close as you get to personalised; the more you tell us, the more we customise to ratings to your needs. Some borrowers value flexibility, while others want the lowest cost loan. Your preferences will be reflected in the rating. 

We also take a shorter term, more realistic view of how long borrowers hold onto their loan, which gives you a better idea about the true borrowing costs. We take your loan details and calculate how much each of the relevent loans would cost you on average each month over the next five years. We assess the overall flexibility of each loan and give you an easy indication of which ones are likely to adjust to your needs over time.