As the Australian mortgage market becomes increasingly volatile, borrowers have been reminded that a low interest rate shouldn’t be the deciding factor when it comes to choosing a home loan.
With numerous lenders increasingly raising interest rates independently of Reserve Bank of Australia (RBA) actions, it’s likely that borrowers are increasingly on the lookout for the lowest rates, but that focus could prove costly according to John Flavell, chief executive officer of Mortgage Choice.
“Many borrowers wrongly believe that they are in the best home loan product for their needs when they have a product that boasts a competitive interest rate,” Flavell said.
“The reality is rates can change very quickly. As we have seen in recent weeks, many of Australia’s lenders have increased their rates independently of the Reserve Bank. This is why interest rates should only play one factor in a borrower’s home loan decision,” he said.
While it may be an important part of decision making process when it comes to choosing a home loan, Flavell said borrowers will only find the loan that best suits them if they consider all aspect involved.
“Mortgage features, fees and lender servicing should all be investigated when selecting a home loan product,” he said.
“By focusing on all of these factors, borrowers can ensure they actually have a mortgage that is right for their needs.”
For example, a fixed rate loan may seem like a good decision now given that rates could suddenly rise, but they often lack other features including repayment flexibility.
In terms of Flavell recommends that borrowers do thorough analysis of what each loan entails including application fees, monthly account fees, redraw fees, additional repayments fees, rate lock fees and break fees.
Borrowers should also consider if the loan allows for a redraw facility or offset account. A redraw facility allows borrowers to put money straight on the loan which can help them to reduce their interest and principal loan amount. Meanwhile, an offset account allows borrowers to put money against the loan indirectly, reducing the interest that needs to be paid.
Flavell said borrowers should also consider the length of their loan.
According to Mortgage Choice analysis, if a borrower takes on a 30-yr $500,000 mortgage with an interest rate of 5%, principal and interest repayments are $2,684 per month. Total loan costs are $966,278 and the interest component is $466,278.
If that same loan was paid out over 40 years, a borrower’s monthly mortgage repayments would be $274 lower, but they would be required to pay an additional $190,993 in interest over the life of the loan.
It can be confusing to know whether to get a variable rate or fixed rate mortgage, and what features are important. That's why it's important to not only check the right rates, but make sure that you're getting the right features in your home loan. Get help choosing the right home loan