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When a cheap home loan could be costly

When a cheap home loan could be costly

Not surprisingly, borrowers often make the interest rate their key point of consideration when shopping for a home loan. But a low rate doesn’t always offer the best deal. Chris Walker reports.

December 1, 2009

A wafer thin home loan rate is always an eye-catcher, especially for first homebuyers, who may be strapped for cash after years of building a deposit. But a skinny rate may be a smokescreen for what could prove to be a costly loan, so it pays to be very sure about what you’re getting for your money.

Thankfully, most variable rate home loans come with the option to make extra repayments at no additional cost. This is a must-have. Even if you’re not in the position to pay more today, your income is likely to rise over time, and paying a bit extra off your loan is the single best way to make big savings on mortgage interest. Many fixed rate loans do not permit, or put a limit on, additional loan repayments.

A pitfall to be wary of is loans that appear to offer a budget rate while being packed with fees and charges. The best way to avoid this trap is by referring to the loan’s comparison rate, which includes most upfront and ongoing fees and charges.

For instance, La Trobe Financial offers a 6-month Intro Variable home loan but the product comes with a raft of upfront fees totalling over $1,500 at the time of writing, which would push up the comparison rate.

Mortgages offering an introductory rate can be problematic because the low rate typically applies for a limited time, reverting to a much higher charge once the honeymoon period is over. The honeymoon period is often for only one year so the majority of the loan term will be stung with a higher rate.

By contrast, basic home loans have some of the lowest rates around and also come with some features and benefits such as an offset account (though usually not 100 percent offset) and a redraw facility.

It goes to show the value of crunching some numbers and checking the fine print to see if a low rate really is as good as it seems.

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