How do low introductory rate mortgages stack up?



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April 7, 2011

Competition in the banking sector fired up last month when CUA launched a new home loan package with an introductory rate of 6.84 percent, one of the cheapest on the market.

But how does it compare with some of the top mortgages monitored by RateCity, and is an introductory rate option the best value in the long run?

Save money on fees
The CUA Intro Variable 1 Year home loan has a 12-month honeymoon period and may be one of the most competitive on the market. With no establishment, transaction or account keeping fees, and discounted home and contents insurance for the first year; it seems like a pretty good deal.

You’ll also get a fee-free redraw facility, 100 percent offset, a construction facility and the option to make penalty-free lump sum payments with the CUA mortgage.

Compared with one of the cheapest variable home loans on RateCity, Collins Home Loans Variable currently at 6.72 percent, the CUA loan will save you about $9500 over 25 years in establishment ($875) and ongoing fees ($345 per year).

It compares favourably on fees with the major four banks too.

Save even more by shopping around
Despite being fee-free, with a comparison rate of 7.21 percent for a $300,000 loan, the CUA loan is slightly cheaper than the market average for standard variable rate loans according to RateCity, but not as cheap as the average basic variable rate at around 7.13 percent.

Nor is it as cheap as Collins Home Loans variable-rate product mentioned above, which has a comparison rate of 6.9 percent.

Less than half a percent may not seem like a significant difference in interest, but over 25 years it can really add up. For instance, if you chose the Collins Home Loan variable-rate product for a $300,000 mortgage, you’d be almost $18,000 better off over the life of the loan than if you chose the CUA option –  despite the cost of fees.

What’s best in the long term?
CUA’s move to cut fees and interest rates simultaneously is good news for borrowers, who may have only seen one or the other slashed by banks in the past. We can only hope that it may also spark reactionary cuts from the rest of the banking sector.

Despite this, it’s clear that introductory rate home loans are not always the cheapest option in the long run for borrowers. And it’s easy to see how you might be fooled into thinking that an introductory-rate mortgage with no fees might be the best option on the market.

However, it’s important to remember that an ongoing interest rate can be a more important factor to the real cost of your loan over time.

 

 

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^Words such as "top", "best", "cheapest" or "lowest" are not a recommendation or rating of products. This page compares a range of products from selected providers and not all products or providers are included in the comparison. There is no such thing as a 'one- size-fits-all' financial product. The best loan, credit card, superannuation account or bank account for you might not be the best choice for someone else. Before selecting any financial product you should read the fine print carefully, including the product disclosure statement, fact sheet or terms and conditions document and obtain professional financial advice on whether a product is right for you and your finances.

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