There’s nothing quite like an interest rate cut to inspire borrowers to shop around for a better home loan deal.
And why not?
The Reserve Bank of Australia has taken the official cash rate to a record low of 0.75 per cent, and while banks haven’t passed on all of those cuts, they’ve slashes the rate on many mortgage products.
But what makes the best home loan?
Here’s the thing – it’s not simply the one with the cheapest interest rate.
When it comes to property investing, there are rarely any simple answers to seemingly simple questions.
What’s the best property to buy?
Which suburbs guarantee growth?
How much should I look to spend?
They seem like pretty straightforward queries, but each has a response that depends wholly on the questioner’s individual circumstances.
What’s the best property to invest in?
It depends on what you’re aiming to achieve – cash flow or capital growth, or a combination of both.
It depends on your budget and it depends on the outcome you’re aiming for in the long-term.
Same goes with the question of suburbs.
What are the growth fundamentals?
What type of dwelling are you considering?
And on the question of budget… well, that’s a whole different kettle of complex fish.
Home loans are no different.
What makes the best mortgage product depends on you much more than it does on the interest rate.
What mortgage products are important to you?
You might be the sort of borrower who benefits from an offset account, particularly if you’ve got good cash reserves that you’re able to funnel into it to bring down your payable monthly interest even further.
A redraw facility might be worthwhile for you, if you’re keen to pay extra into your mortgage and then have the ability to take some of it back out again in the future if need be.
On the flipside of all of this, some loans have features that you might not need at all, but which come with a lower interest rate but have fees attached to them.
Perhaps there are circumstances that make a fixed rate for a certain period attractive for you.
Maybe you are about to start a family or change jobs and the repayment certainty will help you sleep at night – knowing what you’re paying each month for the next “however many” years, regardless of rates in the mid-term, could be very valuable.
There are a lot of considerations to make.
But I believe that in many cases, it comes down to more than just the interest rate.
And the cheapest rate on offer isn’t necessarily the best.
Don’t get me wrong… interest rate is very important as that’s what you actually pay and no-one should pay a cent more than have to (even though Australians every day cost them hundreds, even thousands of dollars due to their laziness) but it’s not the only thing or determination that defines the “best” home loan for you.
There are some mortgages on offer at the moment, from both major banks and secondary ones that have an interest rate with a two in front of it.
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That’s pretty incredible, especially when you cast your mind back to three or four years ago.
But lenders aren’t charities.
They’re running businesses and have their eyes on making a profit for themselves and their shareholders.
A rate with a two in front of it might only allow you to borrow up to a certain figure. It could be that by choosing cheap, you’re limited to a ceiling of around $500,000, whereas an interest rate of three per cent or more could see that bumped up to $750,000.
Similarly, a higher variable rate that begins with a four could boost your borrowing capacity amount to $1 million.
So now you have a decision to make – what’s more important?
If you’re investing and have a buy-in price of around half a million dollars, then a super low rate might be the thing that makes your loan the best.
But if you’re looking to upgrade your current property to buy your dream home, then obviously a bargain basement rate isn’t best.
The other thing to examine are the fees attached to a loan product.
When interest rates are low, lenders need to consider other ways to cushion that lost profit, and they typically do it with fees.
Establishment, servicing, product and break fees detailed in the fine print can quickly add up over a short period of time, wiping out a big chunk of those savings you’ve made from merely picking the lowest interest rate.
What has now become very common place is an ongoing annual “package” fee that is inclusive of loans and other products i.e. offset account and credit cards to include your whole banking package.
Banks love this as it gives them more of your business.
Going to one of those comparison websites and sorting by ‘lowest rate’ isn’t the smartest way to pick a home loan product.
As I’ve outlined, there are far broader considerations to make.
Of course, the big one is serviceability.
What can you afford to pay now?
And what can you afford in the future?
Rates are low right now but factor in future rate rises should they occur.
What package features are important to you?
Which ones could you do without paying for?
Where might you be in two, three, four or five years and beyond and how might that impact your borrowing arrangements?
How much are you looking to borrow?
Does the loan product you’re looking at allow for this?
What about a fixed or partially fixed rate?
Do you value certainty or is flexibility more important?
Finding the best home loan for you and your individual circumstances is a complex process.
It’s why seeking the services of an independent, qualified and experienced financial professional is the only way to ensure you’re getting the best deal.
Don’t chance it on a home loan search engine or one or two online enquiries.
It could end up costing you a small fortune.