Misdirection is a favourite tool with magicians – they've been using it for years.
As if hypnotically, your eye is drawn to the performer's left hand waving a brightly coloured scarf, while the right hand sneaks into a hidden pocket to grab a coin that soon appears – out of nowhere.
The scarf is known in the magic trade as a prop, because it 'props up' the overall illusion.
The prop and the slightly exaggerated gestures that draw your attention are deliberately designed to guide your gaze to an area where the magician wants you to look, or – quite frankly – to keep you from looking where he doesn't want you to.
If you want to figure out what's really going on, you need to look at the hand that isn't waving frantically in the air.
Of course, it's not always a scarf – sometimes it's a scantily clad assistant, a clown, a magic wand or just about anything else you can imagine. It just comes down to how the magician thinks they can successfully capture the attention of the audience and hold it – and this creates an illusion.
Like magicians, lenders, mortgage originators and mortgage brokers have been making carefully choreographed moves and waving brightly coloured scarves to capture business for ages. In recent times, increased competition has created new pressure on lenders to find new props to get your attention – and they are all designed to trigger your curiosity or gain your confidence.
From my own perspective, some of them seem less honest than others, although I have trouble calling any of them particularly fair. The usual suspects you're likely to be familiar with include:
• No application fee
• Apply now! For a limited time our variable rate is a low x.xx%
• Big savings on the Big 4 standard variable rate
• No fees
• Low comparison rate
• Free holidays, plasma or other gimmicks
Let's just take a quick look at a couple of them in detail.
1. No application fee
Most people seem to think this means the lender is focused on providing a lower-cost mortgage that’s more accessible. It suggests you lose money if you make an application then change your mind, or make an application with a lender who does have application fees.
Like many of the terms used in the mortgage industry, 'application fee' has a different meaning depending on who you are talking to and lenders promoting the ‘no application fee’ message are making the most of this confusion. It is commonly thought that an application fee is the only one you pay to establish a loan and that all lenders charge.
The reality is, however, that very few lenders have an application fee and, mostly, it isn’t paid unless you proceed with the loan – and can be added to the loan to make it easier for you. But, regardless of whether a lender has an application fee or not, it usually pales into insignificance when you take the overall cost of the loan into account. Of course there are some outrageous application fees out there and you should really watch out for them.
Look out for
1. The other fees involved, such as valuation fees, documentation fees or documentation-preparation fees, disbursement fees, legal fees, mortgage insurance and settlement fees. And, for fixed rate loans, ask about rate lock fees and terms and conditions.
2. Any fee indicated as 'not ascertainable' if the lender is not prepared to indicate an amount you could expect.
3. The interest rate.
4. Ongoing fees.
5. Any fees payable when you end the loan agreement and give particular attention to fees payable in the first five years as, statistically, these are likely to apply to you.
In some cases, the word 'fee' may be substituted for 'penalty'.
These include early payment fee, deferred establishment fee, early
exit fees, settlement fees, discharge fees, break costs and rebatable establishment fees.
2. Apply now! For a limited time, our variable rate is a low x.xx%
You are dealing with a super-competitive lender and have a limited opportunity to get a variable rate home loan well below market interest rate (often quoted as the ‘banks’ standard variable’) that is going to save you thousands and thousands of dollars if you apply before a certain date.
This type of promotion usually follows a change in the Reserve Bank of Australia's (RBA) target cash rate and is known in the industry as 'holding back'. Less honest lenders promote a held-back rate heavily in order to appear more competitive after rate rises. However, what the lender understands by it is that by the time your loan settles, or shortly after, it jumps to the real rate.
Worse still, you might also get multiple rate rises in one go as these lenders usually have heavy early-exit penalties because customers – understandably – often want to change lenders when they discover they've been tricked. If you haven’t budgeted rate increases into your repayments, you could wind up in real trouble – really fast.
Although this practice is unethical and dangerous, it is currently legal. Due to increased competition and the general success of this trick, lenders have recently started to exploit this type of promotion more regularly, regardless of whether there has been a rate change announcement or not.
So beware – if the loan is not a fixed rate one and the offer is only available for a 'limited time', it's almost certainly a trap.
Look out for
1. Any variable-rate home loan that promotes an interest rate that lasts for a limited time.
2. Any fees that are payable when you end your loan agreement within the first five years.
3. A rate-change history that does not match changes in the Reserve Bank of Australia's target cash rate.
3. Big savings on the Big Four standard variable
Like the claim you just read about, it is designed to make you think you are dealing with a super-competitive lender that’s going to give you access you simply cannot get if dealing with a large lender.
Standard variable is a bit of an urban myth. Although it's a little off the track, it is important that you understand what a 'standard variable rate' is. Most people don't, and the 'standard variable rate' is a nifty piece of jargon used to by unscrupulous lenders to hoodwink unsuspecting consumers into a false sense of savings.
The first part that confuses most people is the first word 'standard'. According to the Australian Oxford Dictionary, ‘standard’ is a measure serving as a basis by which others can be compared. If you find yourself re-reading that definition – don’t worry, I did too.
What it means, however, is that a standard variable rate is a benchmark rate that each lender uses to set prices for its own variable rate products.
The four most important things to understand are:
1. Unlike the RBA's 'target cash rate', the 'standard variable rate' is not set industry wide
2. Each lender has its own, individual standard variable rate
3. It's usually the 'fully loaded' rate and most products – if not all – have a rate discounted below the lender's standard variable rate
4. Nobody should ever, in fact, have a mortgage that is charged at standard variable rates
So, if you ever find yourself paying the standard variable rate, run screaming from the building and get yourself a good mortgage broker to find you a better deal.
Look out for
1. Any lender that is using this ploy to entice you, and
2. Honeymoon or introductory rates. As competition heated up in the first part of 2008, some lenders reinvented the introductory rate loan. These products are available on the basis that rates are reduced for a limited time by x% below that banks' standard variable. Although they may appear enticing, they are more expensive than loans with similar features that don't have the flashy 'introductory' rate.
4. No fees
Strangely, this claim is often made verbally, but never seems to be printed anywhere. In all the years I've been arranging mortgages and comparing them, I have yet to see any mortgage or home loan that has 'no fees' – although plenty of people claim they exist. If you ever actually find it in writing, please let me know.
But on the off-chance that you do, you may want to look more carefully at the interest rate, the method of calculation and any charge that's 'not ascertainable' and 'may become payable'. You might also find them called disbursements or charges. Look closely – they'll be there.
While they have your attention firmly focused on 'no fees', they are able to keep your eye away from other things that may not become obvious or important to you until it is too late.
5. Low comparison rate
The comparison rate is a simple way of comparing apples to apples. The lower the comparison rate, the less expensive your mortgage works out to be.
The comparison rate was introduced by the government to benefit you, the borrower, by taking some of the marketing shine off home loans with hefty fees, or start-offs at a low rate that jump in a year or two. However, you may also be familiar with the expression 'the road to hell is paved with good intentions'.
Putting aside the lack of consideration as to whether a loan has the right features for you, perhaps the most significant problem with comparison rates is that they are formula driven and this formula doesn't reflect the likely outcome for most people.
The main reason is that the formula excludes unascertainable fees – which means there may be hidden ones – and also excludes unascertainable discounts and rebates, which means there may also be additional savings and additional costs.
When you factor in these amounts, it’s quite common for a loan that has an advertised comparison rate that is 0.5% per annum higher than a similar loan with a lower rate to work out significantly less expensive than a loan with a lower comparison rate.
The answer is to have lender information presented to you on the overall cost for your individual situation. After all, your situation is unique and you earn – and spend – dollars and cents, not percentage points. You should also work out the lenders or mortgage originators you would like to deal with, but don’t short-list lenders and loans until you receive the overall cost calculations. A mortgage analyst or broker can simplify this process and save you time with this step.
A quick word on FREE ANYTHING
There's no such thing.
One of the most ridiculous things I've ever read…
Although it's probably not most people's idea of fun, I like to read through the latest mortgage advertisements, visit lender websites, talk with the people involved, consume promotional material and work out fact from fiction.
What I have learnt after years of doing this is that when it comes to lenders’ latest greatest deals, there is almost always a catch. In addition to misdirection, another favourite tool in the mortgage magician’s kit – and that of many politicians, too – is 'spin', the art of turning or spinning a negative around so that it appears positive.
I encountered one of the most entertaining attempts at spin I’ve ever read as I recently waded through the propaganda of a highly awarded lender (well, mortgage manager actually, but more on that later). Under the heading "FACTS", there was a sentence that read:
"With one of the lowest, fully featured variable rate home loans in Australia, why would you ever want to leave!?"
Why, indeed? If it actually is fully featured and has one of the lowest rates in Australia, you’d have rocks in your head to want to leave such a fantastic lender that gives you everything you want for so much less.
However, if all this were true, why do they charge up to 2% of the original loan amount, plus a further $550 for ‘early termination’? That’s a lot of stick for a business that purports to be all carrot. Add to that the set-up fees of almost $1,000 plus another 0.66% of the loan amount and you start to see why they focus their advertising – and borrowers' attention – on 'lowest rates' and features.
If you factor in fees that the average person is likely to have to pay to this lender, you’ve got a loan with a great rate that is probably going to cost more than one of the standard variable bank loans.
If that isn't scary enough, I would like to focus for a moment on one of the most commonly used features that are included in this 'fully featured product' – top-ups.
A top-up is when you use your home loan to access equity rather than taking out a new loan at higher, personal loan rates. You simply make contact with your lender or broker and request one. Charges between lenders and different mortgages vary, but you don’t have to look very far to find a bank that will handle a top-up for $400 or less, regardless of the actual top-up amount.
But if you fell for the 'lowest rates' misdirection magic of this lender, you would be charged: "about $600.00 + application fee (if applicable), stamp duty & mortgage insurance premium (regardless of lending ratio, minimum premium say $210.00)".
In simple terms, the minimum lender fee for this facility is $810 – or more than twice what a bank would charge.
A final thought
A home loan is best considered as an overall solution, so it's no use looking for a specific characteristic such as 'no ongoing fees'. If you choose to focus on a specific aspect of a loan, you run the risk of misdirection from any lender or mortgage broker.
Having a person focus on one point is a common trick used by both magicians and salespeople alike.
The best way to avoid this rather treacherous trap is to outline the functions you need from your loan before you talk to lenders. You can then ask broker, or each lender you are interested in, to calculate the overall cost for your situation across the life of the loan – and go from there.
Make sure they factor in fees and rebates that apply to you as an individual and add any set up fees to the loan amount – this is called capitalising fees and helps standardise comparison. You should also compare them on minimum monthly repayments and initially exclude consideration for extra payments or offsets as they may never happen.
Then, using this list, you are in a position to rank them on cost – which includes fees, charges and interest rate – knowing that the loan does what you need it to do.
Finally, simply work your way down the list until you find the right mix of price and reputation you want.