Does your mortgage reward your loyalty?

Does your mortgage reward your loyalty?

June 9, 2011

The number of lenders offering loyalty discounts to mortgage customers has almost doubled in six months, as competition in the home loans market heats up.

Loyalty discount home loans reward borrowers with a rate discount after they have held the loan for a certain period of time such as one or two years, encouraging continued loyalty. For instance, a loyalty discount home loan with an initial rate of 7.2 percent may drop by 20 basis points to 7 percent after a year.

These types of loans came back into the spotlight out of new legislation, which comes into effect next month and will abolish banks’ use of excessive early exit fees. So, institutions are now finding new ways to retain customers using reward rather than penalty.

While there are still only a handful of loyalty discount loans in the market – RateCity currently monitors nine, up from five in December 2010 – the rapid growth in this sector may signal broader market changes.

Damian Smith, chief executive of RateCity, says more lenders are rewarding customers for not switching, rather than hitting them with exorbitant fees.

“Loyalty discounts are an easy solution for lenders to help them retain their customers and we’re expecting more incentives like these to enter the market in the coming months,” he says.

Participating institutions
Most recently, Homestar Finance,, Ratebusters and UBank joined the list of lenders offering loyalty discount deals to mortgage customers – although UBank is offering its 20 basis point discount upfront in a promotion that ends on June 30.

Other lenders offering loyalty discounts include Bankwest, CUA, ECU Australia, Gateway Credit Union, HSBC and State Custodians. Compared to 18 months ago, only one of these lenders – State Custodians – offered the discount.

Of these nine lenders, Bankwest offers the largest rate reduction on its Rate Cutter Home Loan. It has an advertised standard variable interest rate of 7.3 percent and offers an 80 basis point discount after five years, which stands for the remainder of the loan term.

Things to look out for
Reward-based home loans may seem enticing, but consumers are being urged to read all of the conditions attached to the loan and know what they’re signing up for. So look out for fees and charges and be aware that some of these loans offer only limited features compared with others on the market.

“It’s important to compare home loans by comparison rates, which is the average rate over the life of the loan and includes ongoing fees,” Smith says.

“By doing this, you can see if you’re getting the best value overall.”

By selecting a mortgage with a low interest rate form the start of the loan, you may save more money over 25 or 30 years than if you opt for one that discounts down the track. Also, revisit your mortgage every 12 months and compare home loans on the market to ensure you’ve still got the best deal available. Just be aware that switching home loans can involve exit and establishment fees, so weigh up the costs.



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Learn more about home loans

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 appraised value?

An estimation of a property’s value before beginning the mortgage approval process. An appraiser (or valuer) is an expert who estimates the value of a property. The lender generally selects the appraiser or valuer before sanctioning the loan.

Who offers 40 year mortgages?

Home loans spanning 40 years are offered by select lenders, though the loan period is much longer than a standard 30-year home loan. You're more likely to find a maximum of 35 years, such as is the case with Teacher’s Mutual Bank

Currently, 40 year home loan lenders in Australia include AlphaBeta Money, BCU, G&C Mutual Bank, Pepper, and Sydney Mutual Bank.

Even though these lengthier loans 35 to 40 year loans do exist on the market, they are not overwhelmingly popular, as the extra interest you pay compared to a 30-year loan can be over $100,000 or more.

What do mortgage brokers do?

Mortgage brokers are finance professionals who help borrowers organise home loans with lenders. As such, they act as middlemen between borrowers and lenders.

While bank staff recommend home loan products only from their own employer, brokers are independent, so they can recommend products from a range of institutions.

Brokers need to be accredited with a particular lender to be able to work with that lender. A typical broker will be accredited with anywhere from 10 to 30 lenders – the big four banks, as well as a range of smaller banks, credit unions and non-bank lenders.

As a general rule, brokers don’t charge consumers for their services; instead, they receive commissions from lenders whenever they place a borrower with that institution.

Why is it important to get the most up-to-date information?

The mortgage market changes constantly. Every week, new products get launched and existing products get tweaked. Yet many ratings and awards systems rank products annually or biannually.

We update our product data as soon as possible when lenders make changes, so if a bank hikes its interest rates or changes its product, the system will quickly re-evaluate it.

Nobody wants to read a weather forecast that is six months old, and the same is true for home loan comparisons.

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.

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The proportion you have already saved to go towards your home. 

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.

How will Real Time Ratings help me find a new home loan?

The home loan market is complex. With almost 4,000 different loans on offer, it’s becoming increasingly difficult to work out which loans work for you.

That’s where Real Time RatingsTM can help. Our system automatically filters out loans that don’t fit your requirements and ranks the remaining loans based on your individual loan requirements and preferences.

Best of all, the ratings are calculated in real time so you know you’re getting the most current information.

How often is your data updated?

We work closely with lenders to get updates as quick as possible, with updates made the same day wherever possible.

What is a construction loan?

A construction loan is loan taken out for the purpose of building or substantially renovating a residential property. Under this type of loan, the funds are released in stages when certain milestones in the construction process are reached. Once the building is complete, the loan will revert to a standard principal and interest mortgage.

What factors does Real Time Ratings consider?

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

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What is the ratings scale?

The ratings are between 0 and 5, shown to one decimal point, with 5.0 as the best. The ratings should be used as an easy guide rather than the only thing you consider. For example, a product with a rating of 4.7 may or may not be better suited to your needs than one with a rating of 4.5, but both are probably much better than one with a rating of 1.2.