Is your interest rate the most important part of your home loan?
Interest rates are the talk of the town. Will they go up? Will they fall again? With Australia’s national cash rate at an historic low, consumers want more from their banks than ever – and they’re not often thinking about loan structures and features. Nope, it’s all about the lowest interest rate possible in today’s lending environment. With consumer’s emails and social media feeds flooded with low-rate offers on a daily basis, it can leave one wondering: is interest rate the ‘be all and end all’ of a home loan?
It’s important for consumers to understand that when lenders offer mortgagees an ultra-low rate, there’s always something in it for them. Whether that means locking you into an inconvenient fixed-term arrangement, hiking up fees or cutting your access to benefits like offset accounts or redraw facilities – something’s got to give. Attracted by bargain interest rates? Think twice before engaging with a lender promising competitively low rates.
Here’s what matters more than a low interest rate:
Offset and redraw: If you’re at a pivotal point in your career, you could be looking at a pay rise – which means more monthly income to pay down your loan. Make sure your uber-low rate loan allows you to make larger repayments on your mortgage – as this isn’t always the case. Equally, determine whether your loan offers a redraw facility. Paying down your loan with additional funds is great when you can afford it – but what if you fall ill, have unexpected outgoings or lose your job? Can you redraw on those extra funds? Consider your offset facilities, too. If you’ve got savings you want to offset against your loan balance, you’ll need to ensure your loan comes with this important feature. Word to the wise – when interest rates drop, so do your loan extras.
Certainty and uncertainty: Low rates generally come attached to a fixed term period. This suits many clients, as it allows for a base level of certainty about monthly outgoings – which is ideal for property investors, or those going through a period of haphazard cash flow. If you need flexibility, however, a variable rate may be more suitable for your circumstances. Variable rates can change at any time – which is great when they’re dropping, and somewhat less jolly if they’re rising. You may wish to consider a proportional split, whereby you fix a portion of your loan and leave the remainder on a variable rate. This gives you a sense of certainty about your regular outgoings without the sacrifices of a fully fixed-term loan arrangement.
Banking structure: Many clients get caught up in acquiring the lowest rate possible, forgetting that they’ll need to deal with their lender or bank at some point in the future. Consider your loan’s features and your bank’s accessibility. Do you need internet banking? Is a credit card important to you – and if so – what interest rate can you negotiate? Does your lender have branch access, or are all serviced internet or phone-based? Consider your personal preferences and make sure your lender is aligned with them. As you’re likely to have your loan for a number of years, it’s important to make your borrowing experience streamlined.
Policy type: Look at your lender’s policies carefully – and don’t gloss over the details. Factors that might not affect you today may become critical in the future. Will the lender be able to support you through renovations? Would they look favorably upon your project to build an investment portfolio? Some banks don’t offer construction finance, and others are circumspect about the proportion of rental income to loan. Dig deep and ask questions!
Reputation of the lender: How well regarded is your lender? Are they likely to hike up your rate as soon as your fixed term is over? Consider their values, ethos and brand personality – the easier their staff are to deal with the better.
Loan structure: Is the loan structured to suit your personal needs? Speak to your broker about whether you should purchase the property in your name, your partner’s name, in a trust or together. Different circumstances lend themselves to different arrangements. Also look at how you’ll repay the loan – will you pay interest-only for a period of time? Your broker will be able to explain how different lenders respond to different situations.
All these considerations should be applied to both your circumstances today – and your likely life stage in five years. Futureproofing your home loan can save you fees and hassle, making your borrowing experience much simpler. While you can’t foresee everything, being savvy and planning ahead will leave you with a loan and a lender you’ll be happy with in years to come.
In short – there’s plenty for mortgagees to consider beyond a low interest rate! Whilst many clients are most focused on their rate as it’s the most immediate determining factor of their borrowing capacity, I always strive to present numerous options that will suit them best. Want to learn more? Reach out to me and my team at Hatch Financial Services for expert advice on every aspect of your home loan.