Looking for the cheapest home loan – well beware as cheap is not always best.

Interest rates are at historical lows.

If the interest rate was the only measure for choosing a home loan then there would either be only one lender or all lenders would offer the same rate – it simply isn’t that simple. The cheapest rate is not always the cheapest home loan and often not the best home loan. As Dr Peach often points out, home loans are like fridges and just like fridges the starting price should not be your sole deciding factor.

Take fixed rates for example at the moment are very competitive where as historically they are half to one percent above the variable interest rate. However for some people the peace of mind knowing that they are safe from a big rate is worth the cost. How do you value peace of mind.

A few years ago the regulators introduced the Comparison Rate as a measure to allow borrowers to compare loans on a level playing field.  Unfortunately like so many regulations it added red tape with no worthwhile outcome.  Lenders messed around with their fees, in some cases charge annual fees to your credit card rather than the home loan. The result is the quoted Comparison Rate is often farcical and should be ignored unless you are using a CR calculator on your own specific scenario.

Another issue is that most calculators compare the cost of the loan over the life of the loan, when in reality very few loans last more than 10 years and quite a lot don’t last 5 years.  There are many good reasons eg:

  • borrowers realise that what was a good home loan a few years may not be so good today,
  • borrowers become unhappy with lender’s service,
  • borrowers want to upgrade or move ( portability is not always a good option ),
  • borrowers buy an investment property and leverage their equity by refinancing
  • borrower’s situation changes and they need to renegotiate

It is very difficult to ascertain all of the fees and charges from a lender’s web site.  Many charges are only disclosed when the loan offer is made and this usually too far into the process to allow time to shop around for a better deal.

Some home loan costs are extremely difficult to calculate with introductory periods and exit fees, discharge fees. Many lenders claim ‘NO APPLICATION FEE’ but overlook the fact that they charge valuation, legal and document fees.  Other lenders say “no deferred establishment fees’ but don’t mention that their standard discharge fees are 2 or 3 times the normal.

 

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