Out with the old, are new home loans ripping us off?



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Jack Han investigates new home loan features arriving on the market.

September 19, 2009

As competition heats up between the banks, new home loan features are sweeping the mortgage market in a bid to attract consumers to fresh, innovative products. However, if you are not careful when comparing new home loans, you may find yourself burned by bad deals.

Bankwest has been the most recent innovator with its Capped Rate Home Loan, which offers a limit of 7.5 percent p.a. on its variable rate (currently advertised at 5.4 percent p.a.) until November 10, 2012. This means that if variable rates rise above 7.5 percent before the three-year period, borrowers on the Capped Rate Home Loan will only need to make repayments at 7.5 percent p.a. interest.

This follows Bankwest‘s launch of the Rate Tracker Ultra Home Loan last month, which guarantees an introductory variable rate that is 0.9 percent lower than the average standard variable rates of the big four banks, for the first three years of the loan. After the first three years, the loan will revert to Bankwest’s Lite Home Loan, which currently has an advertised variable rate of 5.58 percent p.a.

The benefit to borrowers is that there is more choices than ever when it comes to customising your home loan. For example, if you are unsure of interest rate movements, but wanted to hedge against an unexpected climb in the near future, the capped home loan would suit your needs.

On the other hand, low to moderate interest rate movements will complement the Rate Tracker, which will ensure that you receive one of the most competitive variable rates on the market over the budding years of your home loan.

However, with new features come new pitfalls. This means that curious consumers will need to read up on the terms and conditions of new creative products to understand its different fees, and the consequences of breaking the terms, to avoid being trapped by sudden boosts to the rate.

But are these new features really worth their hype? By comparing different types of home loans, Australians may find equally competitive deals from standard products.

For example, Sam wants to borrow $275,000 for 25 years, and wants to find the best way to combat rising interest rates that he expects to occur in the next three years. He’s considering the Bankwest capped home loan, which currently has a comparison rate of 5.5 percent p.a., as well as today’s lowest three- year fixed home loan with an advertised rate of 6.49 percent p.a. from MECU .

If the capped home loan variable interest rate only increases by 0.5 percent after the first year then another 0.5 percent 12 months later to be 6.5 percent at the end of the three-year term, Sam could save more than $5,000 in the three-year period.

However, in the case of the capped variable interest rate rises to 7.5 percent after one year, there will be almost no difference in monthly repayments between the two products for the first three years.

The new features of the capped home loan are appealing in comparison to potentially rising variable rates, and Australians who fear interest rates of 8 and 9 percent will likely favour it over standard variable products. However, if rising rates are the real danger, locking in a fixed rate below 6 percent could be the real solution.

We will always see new gimmicks and innovations when competition and interest rate concerns reach a boiling point. However, if you simply compare home loans online to find the most affordable product for you, old traditions can beat new tricks.

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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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