Are you a loyal home loan customer? If so, you could be rewarded by your lender with lower interest rates.
Some home loan providers offer loyalty discounts as an incentive for borrowers to stay, rather than switch to another lender. These can include rate discounts to borrowers that have held the loan for a certain period of time, such as three years.
For instance, a loyalty discount mortgage may have an initial rate of 7.2 percent, but drop by 20 basis points after three years to a new rate of 7 percent, which stands for the life of loan.
In mid-2011, the number of loyalty discount home loans almost doubled compared to six months earlier as more lenders rewarded their home loan customers for not switching to another lender.
The growth in the number of loyalty discount mortgages coincided with an announcement that excessive early exit fees on variable rate mortgages would be abolished by July 2011. As a result of the legislation, lenders would have to find new ways to retain home loan customers rather than with hefty early exit fees.
Loyalty discounts already existed in the market prior to this, however in small numbers. But we’re likely to see more and more lenders offering incentives to keep their mortgage customer with loyalty discounts going forward.
That’s because they are an easy solution for lenders to help them retain customers, as opposed to penalising them with excessive fees.
Keep an eye out for
Loyalty discount mortgages can seem enticing. But it’s important to compare home loans using the comparison rate, which is the average rate over the life of the loan inclusive of ongoing fees. By doing so, you’ll be able to see the real cost of the home loan and more easily compare it others on the market.
You may find that by selecting a mortgage that has a low interest rate from the start of the loan, you’ll likely save more money in the long run than if you opt for a loyalty discount home loan.
Consider two home loans – one with a variable rate of 6.69 percent (comparison rate of 6.81 percent) and a loyalty discount mortgage with an initial rate of 7.30 percent that is discounted to 6.50 percent after five years (comparison rate of 7.09 percent).
Despite having a lower ongoing rate, the loyalty discount mortgage has a higher comparison rate than the other home loan. In dollar terms, for a $300,000 mortgage over 25 years the interest charged on the loyalty discount home loan would be around $16,000 more than if you opted for the low-interest mortgage from the start. So clearly, it pays to do the sums rather than be drawn into clever marketing campaigns.
To do your own sums use the RateCity home loan comparison tool and home loan repayment calculator. By comparing home loan products you can find a home loan that is going to save you the most money over time.