The hidden costs that you didn’t know about…

If the low rate home loan advertised by your bank sounds too good to be true, it probably is!

How can you avoid the traps of clever marketing and ensure you’re really getting a good deal?

What are low rate home loans?

Low rate home loans are a marketing gimmick designed to “bait” or attract new customers with a heavily-discounted variable rate.

The problem is that when people call up enquiring about the deal, most of them will find they don’t qualify.

In addition, the product is usually very basic and won’t have all of the features that most people are after such as an offset account, the ability to make extra repayments or the option to fix without being charged a high fee.

Banks know this so the real aim is to “switch” you to another one of their products with a higher interest rate.

This is known as “bait and switch” in the industry.

Want to make sure you’re not being taken for a ride when choosing a home loan?

Our mortgage brokers can help you separate fact from fiction so call us on 1300 889 743 or complete our free assessment form today.

Getting approved is tough!

Low rate home loans are basic in nature but getting approved is actually tough.

That’s because they tend to have two main restrictions.

Restricted LVR

With a standard home loan, you can typically borrow anywhere between 90% and 95% of the property value, otherwise known as the Loan to Value Ratio (LVR).

The problem with low rate home loans is that you’re usually restricted to around 80% or even 70% LVR.

To put it another way, for a $500,000 home loan, you might only need a $25,000 deposit to qualify for a standard variable rate home loan.

With a low rate home loan, you may need as much as $100,000 to qualify.

The amount you can borrow is also restricted

On top of a restricted LVR, your borrowing limit is also restricted.

In fact, you’ll usually have to jump through such hoops as a minimum loan amount of $250,000 and a maximum loan amount of $500,000.

If you don’t fit into this neat hole, you won’t get approved!

Example of bait and switch

Bait and switch was the main strategy behind Wizard Home Loans’ Rate Breaker Loan.

Lenders like Wizard would purposely find the lowest rate on the market and undercut that lender, let’s say, by around 10 basis points.

People would be enticed by the low rate but would find they needed a large deposit and were restricted to borrowing up to a certain loan amount.

The loan itself offered little to no features and was designed to be “set and forget” for the life of the loan (30 years).

Not many people met the criteria and others wanted more features and were switched to another product.

On top of that, staff weren’t really incentivised to sell the product and would switch customers to a more expensive product.

Low rate loans often have high fees

Even if you do qualify, there are often high fees tacked on to these products that make them less attractive than the bank would have you believe.

These fees are applied across most aspects of the mortgage including:

• Establishment fees
• Account-keeping fees
• Switching fees
• Application fees
• Redraw fees
• Exit fees
• Refinancing fees

These fees have a huge impact on your flexibility as a borrower such as if your situation were to suddenly change and you decided that you wanted to fix your interest rate.

Similarly, your plans to buy a second home or upgrade your existing property could see you charged with an exorbitant fee.

Introductory rates are a type of low rate home loan

An introductory rate is a special discount that’s only offered for the first year of your mortgage.

After the first year, your rate will switch to a much higher interest rate or a different loan type, otherwise known as the revert rate.

This would have been spelled out in your loan documents but people often overlook it.

The reason is that they’re often happy with the fact that they’re able to get ahead with their mortgage with little change to their lifestyle expenses.

The problem is that after the first year, they get a nasty surprise when their rate reverts.

You can find out more about honeymoon rates by checking out the introductory rate home loan page.

Are banks allowed to do this?

If you sign up to a low rate home loan, banks can increase your rate as much as they like.

That’s because the rate itself is variable and not fixed.

In fact, banks know they can get away with it because:

• They know low rate home loans attract new clients.
• They know existing customers either don’t check their interest rate at least in the first 3 to 4 years or just become complacent.

The reason why they tack on high fees specifically is that they’re trying to recoup the losses of offering a low interest rate in the first place.

The bottom line, you’re not getting a whole lot of benefit with some lenders.

Read between the lines and shop around with help from a mortgage broker.

In the meantime, why not check out the interest rates we have on offer from our lending panel?

Am I better off getting a fixed rate loan?

The savings of a fixed rate loan are usually more significant than the savings you will make in 1 year with a honeymoon rate.

In addition, the fees associated with low rate home loans tend to make a fixed rate a better option for people who want to know how much their mortgage repayments will be for up to 5 years.

Check out the latest fixed interest rates from our panel of lenders and discuss your situation with your mortgage broker to find out which option is right for you.

Avoid getting a raw deal

Rates aren’t everything!

Consider what type of features will work for your needs and whether the product allows for an redraw, a credit card or a repayment holiday.

Read the fine print of the product the bank is offering you.

In particular, look at the comparison rate and what you’re actually paying for the mortgage including upfront and ongoing fees.

Weigh up the overall costs of the loan over 4 years, which is typically how long most people keep their mortgage before refinancing.

Does it meet your current objectives and how they will your lifestyle change over 4 years?

Not sure which option is right for you?

We can assess your needs and find you the right solution for your situation.

That’s because we understand that a home loan is not all about the interest rate.

Please call us on 1300 889 743 or complete our free assessment form to speak with one of our mortgage brokers today.