When JP* went looking for the right home loan in early 2008, he thought his many hours of internet research had served him well. Yet now, his 'low rate' home loan has an interest rate much higher than he expected. Would it have been a different story had he instead sought a wide range of mortgage advice?
In January 2008, my partner and I decided it was time to buy our first property as our first baby was on the way.
We were buying a block of land to build on, so not only did I need to finance this new block, but I had to refinance our investment property at a much cheaper rate. The combined borrowing came in at less than $400,000. We had planned to build our new house on the block of land in 12 months time and we estimated that we would have to borrow an additional $550,000 to do this.
I decided I would be responsible for searching for our home loan, and was overwhelmed with the differences in rates and fees across the major banks and lenders. I checked over 20 different lenders' home loan products and interest rates.
I didn't seek any other advice from other mortgage brokers or financial advisors before choosing my lender. I didn't know whom to seek advice from and I wasn't completely sure of what mortgage brokers did for borrowers. I didn't know how much they should and would charge for their services, or if the financial institution they recommend in the end was only suggested because they would get a larger commission. Taking the time to do the research online, I decided to head to over to the Your Mortgage website for more information.
My eyes quickly found the table with the Top Five standard variable rate products. At the time, rates had just started to creep over the 8% mark. However there were two mortgage managers (mortgage brokers that also sell their own white label products) who were very similar in what they offered. Both had no upfront fees, or ongoing fees, and both had extremely competitive rates. I was a little skeptical at first because I was scared of borrowing such an enormous amount of money to these 'online only' lenders.
Out of the two, I went with the mortgage manager who offered an interest rate that was 0.10% lower. I spoke to them over the phone and they seemed very genuine. They convinced me to avoid the other one because they had a growing workforce with more overheads to cover, and in the future, would not be as competitive as this one's two man band.
So I took the risk and decided to join with the mortgage manager offering the lower rate. Both managers got their funds from ING Bank, so I thought, what's the difference? If their rates were going to increase they'd increase proportionally right?
When the rate hikes hit
We finally got the settlement in May 2008, and I was excited, even boasting, that we had the best rates in Australia.
In the coming months, interest rates kept rising. I got letters in my mailbox monthly notifying me of yet another interest rate rise. Strangely though, I watched my mortgage manager's rates stay significantly under that of my own 'new' rates.
Finally the economy slowed in August, and there was no indication of a rate rise. In fact, there were talks of a decrease on the horizon. At this time, I received another two letters within a month increasing my rates another 0.50% to 9.09% for my land, and 9.19% for my investment property. My rates were now equivalent to, if not higher than, every other lender's with whom I had initially enquired. I asked the mortgage manager why this was happening and they couldn't answer.
When the rates dropped
In September 2008 the rates dropped, and I was now sitting on 8.84% (land) and 8.94% (investment property), but my mortgage manager was now advertising '8.39%' for an average standard variable home loan. This is because they now have funding through another bank, but I can't help feeling cheated and robbed. From my research, I now have one of the worst rates in Australia.
In addition to this, during the large interest rate drops in October, my rate only dropped 0.70%, where as most other bank lenders dropped almost 1% in total decreases.
The importance of seeking additional advice
I think that seeking additional advice from various mortgage brokers and lenders might have helped me make a more educated decision about the company I used for my two mortgages.
In my research I made sure that I checked all comparison rates, because this included not just the interest rate itself, but the initial fees, any ongoing fees like an annual fee for a discounted rate, or even a monthly administration fee. I also checked about an offset account, or how to direct deposit my pay into the account, with unlimited withdrawals.
Despite the checks I did on over 20 of the major banks, and other lenders, to determine their overall costs, I still got caught. I will now wait until my three initial years are up with my mortgage manager and their home loan product to avoid excess exit fees (nearly $8,000), and will be refinancing my accounts to another lender, which includes the additional funds I require for building my house.
I recommend that all borrowers do their homework on their mortgage manager, mortgage broker and lender, and if they're unsure about them, seek professional council before taking their advice or products. If they feel safer by paying extra and going with a major bank for the extra security, then go for it. At the end of the day, if it sounds too good to be true - it probably is.
Loan 1: Investment property
Your product: P&I standard variable
Interest rate at start of loan: 8.19% (March 2008)
Height of interest rate: 9.09% (August 2008)
Your interest rate: 8.14% (as at 31 October 2008)
Your loan amount: $159,000
Your loan term: 30 years
Loan 2: Land purchase
Your product: P&I standard variable
Interest rate at start of loan: 8.19% (March 2008)
Height of interest rate: 9.19% (August 2008)
Your interest rate: 8.28% (as at 31 October 2008)
Your loan amount: $204,000
Your loan term: 30 Years
*Name has been changed to protect privacy
What to ask your solicitor or conveyancer
Conveyancing - the buying, selling and transferring of property - is generally undertaken by a licensed conveyancer or a solicitor. Use this checklist to ensure you have all the necessary and helpful information required about the conveyancing of your property.
- Conveyancers' and legal practitioners' fees for conveyancing are deregulated - there is no standard way in which you are charged. Be sure to find out your conveyancer/solicitor's fee before you proceed and also find out how they charge - flat fee, sliding scale (according to the value of the transaction) or time spent (usually quoted as an hourly rate).
- Find out whether incidental costs (disbursements) are additional. Some may include these in their fee, however others will charge you extra for searches, certificates, inspections, couriers, faxes, post, telephone calls and photocopies.
- Your conveyancer/solicitor may, as a matter of course, hang on to your conveyancing documents. Find out if they charge a storage fee for this. If so, you may wish to hang onto them yourself.
- Find out whether the title of your property influences the cost. The conveyancing costs of Torrens Title property will often be noticeably lower than for Strata Tide or Old System Tide because Torrens Title conveyancing is generally less complex.
- Is the conveyancer licensed to do the type of work you require - ask for professional qualifications if you wish.
- Under the Conveyancers Licensing Act all licensed conveyancers are required to carry professional indemnity insurance - ensure your conveyancer has proof of theirs.
- Check if the legal practitioner charges for preparing the contract of sale and for advising on the mortgage document if this is needed.
- Check if your solicitor/conveyancer handles all correspondence and enquiries from the purchaser once a sale has commenced - this can save you the time and the hassle.
- Have you shopped around? Prices can differ greatly from company to company. Conveyancing for selling your home can start at around $600 and conveyancing for the purchase of a home can start at around $800, but both can cost you thousands if you're not careful. Many companies will even be able to give you a quote by having you fill out a form on the Internet.
- There are plenty of conveyancers who will come to you during or after hours - some even offer 24hrs a day, seven days a week service.
- Lenders will often advocate that you use their recommend solicitor/conveyancer, but make sure that their prices are competitive before you agree. Remember, you are totally free to choose your own - you're paying!
What to ask your real estate agent checklist
- What price did the property last trade at (your agent should be able to find this out for you)?
- Are there any heritage orders on the home that might restrict internal or external renovations?
- What will be the likely rental return?
- What are the current annual rates?
- Are there any approved plans for renovations/alterations to the property.
Have any building/pest inspections been undertaken?
- What is the state of the plumbing and wiring, and is there a report to document this?
- Has a title search been undertaken?
- How long a settlement period are the sellers requesting?
- Has it been checked with the council that no illegal additions or changes have been made to the home by the present or former owners?
- Is the building company title? If so, is leasing permitted?
- Is the building fire rated (for safety)? If not, has there been any discussion to arrange this?
- What are the current levies (strata fees, rates)?
- Are there any special levies pending (e.g. one-off renovations or maintenance charges)?
- What is the size of the block?
- What is the zoning?
- What is the floor space ratio (allowable ratio of building area to total land area)?
- How much of the floor space ratio is currently used?
- Do any of the adjacent homes have plans in council?
10 Questions To Ask Your Lender
Here are 10 questions that you may want to ask your lender when you have that pre-mortgage chat:
- What are the application fees? Your lender will want the cash up front.
- Do I need mortgage insurance? Another drain on your finances.
- How much are the exit penalties? You may want to refinance some time down the track, so find out now how much it will cost to bail out.
- What is the interest rate? Find out rates for fixed and variable loans.
- How much will they lend you? The 64 dollar question.
- How much will my regular repayments be? Don't forget to consider what happens if there is a hike in interest rates.
- How often can I make my payments? Monthly, fortnightly, weekly, lump sums? The more flexible the payment options are, the quicker you can pay off your loan.
- Do you have a redraw facility? A blessing if a new family member arrives or some renovations are needed.
- Do you offer an offset account? Keeping all your funds in a mortgage offset account is a tax effective way of trimming your mortgage costs.
- What if I move home? Find out whether you can take your loan with you.
*This article was first published in the February, 2009 issue of Your Mortgage magazine.