The Loan Arrangement
Sydney Morning Herald
Thursday April 18, 2002
Fixed rate, variable rate? Redraw or offset account? Make sure you choose a mortgage deal that suits your needs. Annette Sampson
With more than 300 types of home loan available in NSW alone, finding the right finance for your dream home or investment can be as difficult as locating the property in
the first place.
But take heart. Despite all the talk of product features and differentiation, home loans are fairly generic. The trick is to know exactly what you want before you shop around.
"You want a loan with a low interest rate and the features that you need, but no more than you need," says Bill Rankin, the lending director with mortgage broker Smartline Home Loans. "If you're not going to use some of these features, it doesn't make sense to be paying for them."
What can you get?
There's an old saying that the cheapest home loan you can get is the one you pay off fastest. So at the very least, you should make sure your home loan allows you to make extra repayments without incurring any costs.
Lisa Montgomery, the general manager at the research company Infochoice, says: "You want the ability to make extra repayments at any time in any amount without paying extra. A redraw facility is good because when you've got a home loan you should never have a savings account. You're earning the equivalent of the home loan rate tax free if you use your savings to reduce your mortgage. With a redraw you can get the extra savings back when you need them."
But check that the redraw facility is flexible. Some carry hefty fees and others only allow you to redraw set amounts of money at a time.
Nicholas Gruen, the managing director of discount mortgage broker Peach Home Loans, says you don't need to take out the more expensive standard variable home loans to get a decent redraw facility.
An alternative to a redraw facility is an offset account. This is a savings account linked to your home loan. Your savings are separate from your home loan, but instead of earning interest on the savings, the interest is used to reduce your home loan.
Montgomery says this can be a good feature if the savings account is a 100 per cent offset account (which means you get the full home-loan interest rate on your savings). But some institutions still pay a lower level of interest.
Gruen says consumers should also be wary of the impressive illustrations that lenders use to show how much you can save by using an offset account. "The offset account itself doesn't save you money. What saves money is your excess savings and you could save just as much by putting those savings into your home loan and using a redraw facility to access them. Usually an offset account is just a way to get you to pay the standard variable rate rather than using a loan with a lower interest rate."
If budgeting is a concern, you may want to get a fixed rate on part or all of your borrowings. This locks in the current interest rate for a period of one to five years. But Gruen says fixed rates are usually higher than variable rates and should mainly be used by people who want the insurance of knowing their rate won't change.
When you're drawing up your list of requirements, says Montgomery, think about the future too. Will the lender give you the flexibility to increase your loan if you need to? Can you go to see them again in three years to make sure you're on track? Can you switch to a fixed rate at no cost later on? Do you need loan portability so that you can take your mortgage with you if you change properties? Getting it right first up can save big money later on.
What you should pay
Rankin says: "If you're paying the standard variable rate or more, you should look to see whether there's another loan available that has the features you need at a lower rate."
He says borrowers should also take care not to be seduced by attractive introductory or "honeymoon" rates. Often these deals come with a sting in the tail. "Ask what the interest rate will be after the introductory period. It's usually the standard variable rate but in some cases it's even higher." Rankin says you should also ask what fees apply if you want to pay out your loan or refinance after taking out an introductory offer. In many cases borrowers who take up these offers are locked into the loan for a fixed period and pay a penalty if they want to get out.
No matter what loan you're looking at, says Rankin, make sure you get a clear list of the upfront fees, any extra "disbursements" you have to pay, the ongoing fees and any fees
that will apply if you want to get out of the loan. Fixed-rate loans also tend to carry penalties or "break costs" if you want to pay your loan off early.
Shortcuts and advice
So where do you start? The experts say the first step is to talk to your bank. Many have packages for home-loan customers that provide benefits like fee-free transaction accounts if you keep all your business with them.
Research groups like Cannex and Infochoice have extensive databases on all types of lending products to give you an idea of whether your bank is offering a good deal. Most major newspapers (including the Herald) carry lists of a range of rates on offer and Montgomery says further information is available online.
© 2002 Sydney Morning Herald