Q. Can you help me to understand the point of comparing home loan interest rates?
Say I look at your comparison rates and find that ‘Lender A’ has the lowest variable rate and I decide to take out a loan with them. After a few months Lender A has been quickly filling their loan books by having a low rate. It then decides to raise its rate and skim some profits to cover its previously low rate. A few months later its rate is higher than the average variable loan. ‘Lender B’ is now the best looking loan – but I’m stuck with Lender A.
What does it mean for a lender to advertise their variable rate? Can’t it just change it to whatever it likes?
A. You raise a very valid point. Lenders are able to adjust their rates, although current media attention on lenders (particularly banks) means that there is pressure for lenders to pass on the full savings of a rate cut and to limit any rate increase to the impact on the cost of funds. Also, certain lenders have worked hard to develop a reputation for offering competitive loans, which would quickly be dissolved should their rates suddenly become uncompetitive.
That said, lenders do offer discounted rates at different times to increase their market share, and these discounted rates don’t last for a particularly long time. Whether an institution that’s competitive today will be equally competitive in three or five years time is impossible to predict, as you correctly point out.
The cost of moving from one home loan to another can be prohibitive, particularly in the first few years of a loan. All borrowers can do is begin with the most competitive loan they can find and then reassess their options each year as rates change along with personal circumstances.
You’re also correct in observing that lenders are conscious of losing existing customers to competitors because rates are no longer competitive. This is another reason for lenders to keep rates at similar levels to their competitors. If rates are dropped for a particular product, it’s normal practice for the lower rate to apply to new customers immediately and existing customers within a short period of time.