Home loan specials, the real cost of rewards

Home loan specials, the real cost of rewards

More than a dozen lenders are spruiking cash back deals, rewards points and even free electricity in a bid to attract new home loan customers. But RateCity has warned that these deals could leave borrowers up to $85,000 out of pocket. 

The Commonwealth Bank is the latest lender to launch a special offer with some of its home loans, kicking off a $2000 cash back deal from this week.

CBA joins the ranks with Westpac – including St. George, Bank of Melbourne and BankSA – as well as Bank of Sydney, Homestar Finance, Northern Inland Credit Union, P&N Bank, Police Bank, Reduce Home Loans, UBank and Virgin Money.

Sally Tindall, spokesperson for RateCity.com.au, urged borrowers to look beyond these incentives and crunch the numbers over 30 years.

“Don’t go choosing something as important as a home loan based on a short-term perk,” she said.

“Free overseas flights or a lump sum of cash might grab your interest, but most home loans have a 30-year term, by which time the holiday will be a distant memory.

“There are lots of specials on the table at the moment because the banks are eager for your business. Growth in home loans is slowing and that’s got the banks’ marketing departments working overdrive.

“If you’re looking for a home loan, first make sure it is a fit for your finances. Then look for a loan with a low rate and low fees. Any cash or points offered beyond that are a bonus, she said.

Current home loan specials and the extra you shell out to get them

Provider Product Perk Rate Extra cost*
Bank of Melbourne Advantage Package $1500 cashback 4.45% $67,941
Bank of Sydney Expect More package Package fee waived for life of loan 3.58% $3,378
BankSA Advantage package $1500 cashback 4.41% $65,384
Homestar Finance Owner occupied loan $900 cashback 3.54% $690
Northern Inland CU Introductory home loan Up to $1000 cashback 3.69% $12,799
P&N Bank & home loan $1000 cashback 3.99% $27,560
Police Bank Premium home loan $1000 cashback 4.74% $75,848
St George Advantage package $1500 cashback 4.42% $66,023
Ubank Discounted rate loan $1,000 cashback 3.69% $9,069
Virgin Money Reward Me variable loan Max 630,000 Velocity Rewards points over life of loan 3.68% $7,039
Westpac Premier Advantage package 200,000 Velocity Rewards points 4.44% $66,842
CBA Wealth Package Variable   $2000 cash back 4.72% $85,051

* This is the extra cost compared to the lowest-rate home loan over 30 years.

Notes: Based on an owner occupier loan of $300,000, paying principal and interest. The costs of each loan have been compared to the lowest rate comparable loan on the market, Reduce Home Loan High Lend loan. All loans are comparable in that they have a 100% offset account and unlimited extra repayments with the exception of Ubank. Value of frequent flier points has been calculated on Syd-Melb return flights, 6 months out, opting for the lowest points. Total costs do not include discharge fees.

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Learn more about home loans

What is a variable home loan?

A variable rate home loan is one where the interest rate can and will change over the course of your loan. The rate is determined by your lender, not the Reserve Bank of Australia, so while the cash rate might go down, your bank may decide not to follow suit, although they do broadly follow market conditions. One of the upsides of variable rates is that they are typically more flexible than their fixed rate counterparts which means that a lot of these products will let you make extra repayments and offer features such as offset accounts.

How do I refinance my home loan?

Refinancing your home loan can involve a bit of paperwork but if you are moving on to a lower rate, it can save you thousands of dollars in the long-run. The first step is finding another loan on the market that you think will save you money over time or offer features that your current loan does not have. Once you have selected a couple of loans you are interested in, compare them with your current loan to see if you will save money in the long term on interest rates and fees. Remember to factor in any break fees and set up fees when assessing the cost of switching.

Once you have decided on a new loan it is simply a matter of contacting your existing and future lender to get the new loan set up. Beware that some lenders will revert your loan back to a 25 or 30 year term when you refinance which may mean initial lower repayments but may cost you more in the long run.

Who has the best home loan?

Determining who has the ‘best’ home loan really does depend on your own personal circumstances and requirements. It may be tempting to judge a loan merely on the interest rate but there can be added value in the extras on offer, such as offset and redraw facilities, that aren’t available with all low rate loans.

To determine which loan is the best for you, think about whether you would prefer the consistency of a fixed loan or the flexibility and potential benefits of a variable loan. Then determine which features will be necessary throughout the life of your loan. Thirdly, consider how much you are willing to pay in fees for the loan you want. Once you find the perfect combination of these three elements you are on your way to determining the best loan for you. 

Who offers 40 year mortgages?

Home loans spanning 40 years are offered by select lenders, though the loan period is much longer than a standard 30-year home loan. You're more likely to find a maximum of 35 years, such as is the case with Teacher’s Mutual Bank

Currently, 40 year home loan lenders in Australia include AlphaBeta Money, BCU, G&C Mutual Bank, Pepper, and Sydney Mutual Bank.

Even though these lengthier loans 35 to 40 year loans do exist on the market, they are not overwhelmingly popular, as the extra interest you pay compared to a 30-year loan can be over $100,000 or more.

What is a fixed home loan?

A fixed rate home loan is a loan where the interest rate is set for a certain amount of time, usually between one and 15 years. The advantage of a fixed rate is that you know exactly how much your repayments will be for the duration of the fixed term. There are some disadvantages to fixing that you need to be aware of. Some products won’t let you make extra repayments, or offer tools such as an offset account to help you reduce your interest, while others will charge a significant break fee if you decide to terminate the loan before the fixed period finishes.

What happens to my home loan when interest rates rise?

If you are on a variable rate home loan, every so often your rate will be subject to increases and decreases. Rate changes are determined by your lender, not the Reserve Bank of Australia, however often when the RBA changes the cash rate, a number of banks will follow suit, at least to some extent. You can use RateCity cash rate to check how the latest interest rate change affected your mortgage interest rate.

When your rate rises, you will be required to pay your bank more each month in mortgage repayments. Similarly, if your interest rate is cut, then your monthly repayments will decrease. Your lender will notify you of what your new repayments will be, although you can do the calculations yourself, and compare other home loan rates using our mortgage calculator.

There is no way of conclusively predicting when interest rates will go up or down on home loans so if you prefer a more stable approach consider opting for a fixed rate loan.

What is a debt service ratio?

A method of gauging a borrower’s home loan serviceability (ability to afford home loan repayments), the debt service ratio (DSR) is the fraction of an applicant’s income that will need to go towards paying back a loan. The DSR is typically expressed as a percentage, and lenders may decline loans to borrowers with too high a DSR (often over 30 per cent).

What are extra repayments?

Additional payments to your home loan above the minimum monthly instalments, which can help to reduce the loan’s term and remaining payable interest.

What is an ongoing fee?

Ongoing fees are any regular payments charged by your lender in addition to the interest they apply including annual fees, monthly account keeping fees and offset fees. The average annual fee is close to $200 however there are almost 2,000 home loan products that don’t charge an annual fee at all. There’s plenty of extra costs when you’re buying a home, such as conveyancing, stamp duty, moving costs, so the more fees you can avoid on your home loan, the better. While $200 might not seem like much in the grand scheme of things, it adds up to $6,000 over the life of a 30 year loan – money which would be much better off either reinvested into your home loan or in your back pocket for the next rainy day.

Example: Anna is tossing up between two different mortgage products. Both have the same variable interest rate, but one has a monthly account keeping fee of $20. By picking the loan with no fees, and investing an extra $20 a month into her loan, Josie will end up shaving 6 months off her 30 year loan and saving over $9,000* in interest repayments.

Can I change jobs while I am applying for a home loan?

Whether you’re a new borrower or you’re refinancing your home loan, many lenders require you to be in a permanent job with the same employer for at least 6 months before applying for a home loan. Different lenders have different requirements. 

If your work situation changes for any reason while you’re applying for a mortgage, this could reduce your chances of successfully completing the process. Contacting the lender as soon as you know your employment situation is changing may allow you to work something out. 

What is a building in course of erection loan?

Also known as a construction home loan, a building in course of erection (BICOE) loan loan allows you to draw down funds as a building project advances in order to pay the builders. This option is available on selected variable rate loans.

Does Australia have no cost refinancing?

No Cost Refinancing is an option available in the US where the lender or broker covers your switching costs, such as appraisal fees and settlement costs. Unfortunately, no cost refinancing isn’t available in Australia.

Can I get a home loan if I am on an employment contract?

Some lenders will allow you to apply for a mortgage if you are a contractor or freelancer. However, many lenders prefer you to be in a permanent, ongoing role, because a more stable income means you’re more likely to keep up with your repayments.

If you’re a contractor, freelancer, or are otherwise self-employed, it may still be possible to apply for a low-doc home loan, as these mortgages require less specific proof of income.

Will I have to pay lenders' mortgage insurance twice if I refinance?

If your deposit was less than 20 per cent of your property’s value when you took out your original loan, you may have paid lenders’ mortgage insurance (LMI) to cover the lender against the risk that you may default on your repayments. 

If you refinance to a new home loan, but still don’t have enough deposit and/or equity to provide 20 per cent security, you’ll need to pay for the lender’s LMI a second time. This could potentially add thousands or tens of thousands of dollars in upfront costs to your mortgage, so it’s important to consider whether the financial benefits of refinancing may be worth these costs.