Mar 3, 2008

Hunt for the cheapest home loan

With the prospect of higher interest rates on the cards you should be searching high and low for the cheapest home loan rate you can get.

If it is a new loan you're after, it is hard to beat the "headline" rates being offered by the mostly non-bank online providers which, at first glance, can be a whole basis point behind the current variable rates being charged by the big four banks.

At the time of going to press - remember financial markets are volatile right now and variable rates are on the rise - the cheapest variable rate online home loan on offer was RateBuster's 7.65 per cent, compared to ANZ's 8.77 per cent.

According to loan comparer Infochoice, there are plenty of cheaper loan options (see tables below). Where they might sting is in the application or termination fees and with the flexibility they offer.

Cheap but not cheerful

Remembering that it was the cheap "teaser rates" offered to thousands of new borrowers in the United States that played a big part in bringing global credit markets unstuck, it might be a good idea to ask what would happen if rates rise. Would you still be able to make the repayments if the starting rate went from, say, 8 per cent to 10 per cent?

In the US the answer was "no" and, when rates began to rise, some people lured by low loans who could not afford the repayments literally walked away from their homes.

Meeting the higher repayments might not be the only trap to watch with cheap loans. Others are the ability to increase the amount and frequency of repayments if you wish to and any costs associated with repaying a loan early.

Negotiate a better rate

It may no longer be common to have a relationship with your bank or credit union manager but dealing almost anonymously with someone online is definitely the extreme as far as communication goes.

No lender yet deals entirely online but if you are not discussing your overall circumstances with anyone, you may be missing out on more than just a cheap home loan rate.

"Assistance with loans can save hundreds of thousands of dollars," says Resi Mortgage Corporation's head of consumer advocacy, Lisa Montgomery.

She cites one example where someone looking to take out a new loan may also have several credit cards and plans to buy a car down the track.

"They could go online and declare all their assets and liabilities and take the loan based on the interest rate they are given," Montgomery says, "or they could talk to someone about consolidating their existing debts into a home loan - potentially reducing the overall interest payments being made on the loan and credit cards.

"Later, when they want to borrow to buy a car, the existing home loan could be split to incorporate the car loan, again making the interest repayments potentially cheaper than if a separate car loan had been obtained."

Then there is the ability to ask for a better rate. "You have nothing to lose, particularly if you are an existing borrower paying a standard variable rate. Otherwise, vote with your feet," she says.

"For years banks have been advertising a standard variable rate but offering various discounts off that. When looking at any loan there is room to negotiate, which is why it can be important to think about forming a relationship with a lender rather than just go for the cheapest option online.

"Some seasoned borrowers choose to buy online because they understand the strategies and feel confident they can maximise all the features of the product. For most people, however, the mortgage is a highly emotional, high-value transaction."

Mortgageport managing director Glen Spratt agrees it is possible to negotiate interest rates on home loans.

"Often brokers who generate a large volume of new business for lenders are well placed to negotiate on behalf of their clients. In some cases they will reduce their commission [paid to them by the lender] to get a better deal for their clients.

"Experienced brokers know which lenders will negotiate and when, as lenders are always balancing market share and profit margins to give them a profitable outcome. Borrowers who borrow larger sums of money usually are better positioned to negotiate," he says.

Extra repayments

Do not underestimate the impact lower interest rates or paying more off your home loan can have on overall interest costs.

If you have a home loan at 8 per cent, every extra dollar you pay off the principal is another dollar you are not paying 8 per cent on each year. If you instead put that extra dollar into a savings account you may only earn 4 or 5 per cent. Therefore putting savings into your loan earns you twice as much as a savings account.

Redraw facilities available on most standard variable loans allow you to take back those extra payments if and when you need them.

Why are rates rising?

The best explanation you will get from any lender about why interest rates are rising is because they currently have to pay more for the money they lend you. Lenders borrow funds from the wholesale credit market which they then lend to customers. The price - or interest - paid for wholesale funds depends on factors including the risk rating assigned to the wholesale lender by rating agencies. The higher the risk, the greater the cost. Global credit markets are being re-rated, mostly to the high-risk category, which is pushing up the costs of funds to lenders and, therefore, borrowers. There has been a longstanding link between the Reserve Bank's official cash rate (currently 6.75percent) and housing loan and deposit rates but the higher cost to lenders is now forcing them to raise rates above the RBA's increases.

By Bina Brown. Extracted from The Age: Money

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