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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, Loans.com.au, 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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