Shop around to reduce rate pain
Tim Blue | January 12, 2008
DON'T be too worried about the pain of a rise in home loan interest rates - only a mug would pay the full whack these days.
Shop around and you could get between 50 and 70 basis points - between half and three quarters of a percentage point - off the advertised home loan rate, to chop it back to 8 per cent from the 8.7 per cent the big banks will soon be charging.
With St George and Westpac deciding yesterday to join their rivals at the Commonwealth, ANZ and National, it might seem a daunting task, but there are still strategies to help keep repayments under control.
Start with the old faithful: "Is that the best you can do?" Selling money is like selling anything else: the price varies according to who you ask and how hard you press. Sometimes a bank has excess cash sitting around that it would prefer to have out working in the form of a home loan, and it may be happy to do a deal.
"If a bank says it will give you half a per cent discount on the standard variable rate of 8.7 per cent, or a non-bank lender says it is much cheaper than a certain bank rate, a borrower should say, 'so what?'," Infochoice general manager Denis Orrock says.
"The standard variable rate in the home loan market has ceased to become a meaningful indicator of home loan rates."
Look on a standard variable rate as a starting point for lenders, brokers and borrowers in comparing home loans.
"If you used a broker, go back and ask them to find the best deal in the market. That's their job as a broker," says Angela Sharkey, a spokeswoman for the Mortgage and Finance Association of Australia.
If you used a big bank originally, the pitch still works: find a broker who has a better rate. When the letter arrives from the bank bearing the bad news of a higher rate, you are ready to say you have a mortgage lender prepared to absorb the costs to win your business.
As in all areas of business, competition sometimes is not pretty. From the outbreak of the sub-prime crisis in world financial markets, big banks slung off at the reputation - and lending rates - of the non-bank lenders in an effort to win back market share.
It's a response to the success of brokers, who have taken about 45per cent of the new business in the past 12 months.
A second area of saving arises in the differences between standard loans and basic loans, which are typically half a percentage point cheaper.
You might not need all the features of a standard variable rate loan. Basic loans do the job and most still have the best feature - the facility to make extra repayments and draw-downs if you later want money back.
As an illustration, NAB's standard variable rate has become 8.69 per cent. Yet its so-called base variable rate is now 7.99 per cent, and if you borrow more than $500,000 the rate falls to 7.94 per cent. Westpac's standard variable will be 8.72 per cent, but it has a no-frills first option home loan at 8.14 per cent and a first-home buyer's special offer rate of 8.02 per cent.
Speaking of specials, NAB has a 12-month introductory variable rate of 7.51 per cent, which of course jumps later.
What happens then is the next area to watch. If you are nervous about where rates might go, NAB will do a one-year fixed rate of 7.59 per cent, rising to a three-year introductory rate of 8.19 per cent. The best deal is a 10-year rate at 7.99 per cent.
As Harry Senlitonga of Cannex points out, fixed rates have become very attractive in recent years. Two years ago fixed-rate loans accounted for only 16 per cent of all residential housing lending, whereas as of last November they accounted for 28 per cent of all residential lending.
"Fixed rates can be a touch more expensive than variable rates, but a borrower can look on that as a form of insurance that lets them sleep more easily at night," he says.
Keep an eye on restrictions on how much you can pay without a penalty, and some have larger break costs than a standard variable rate loan. Don't overlook the non-bank lenders. Since August last year when the sub-prime crisis emerged, the big banks have used the global credit squeeze to disparage the reputation of non-bank lenders in a bid to take back market share. "Scaremongering by banks over the impact of the tightening credit market has done the public a great disservice - which is only now becoming obvious," says Lisa Montgomery, head of consumer advocacy at Resi Mortgage Corporation.
"At the time, major banks delivered a barrage of negative comments informing consumers that non-bank lenders would be more adversely affected than banks by the increased cost of funding, which would be reflected in higher interest rates.
"In doing so they gave consumers the false impression that all non-bank lenders will cost them more to borrow - which is simply not true." Incidentally, in the fallout from the sub-prime crisis, Westpac bought the trading name of RAMS, whose most recent rate on a standard loan was 8.82 per cent. Westpac has since cut that to 8.65 per cent.
Professional packages are another good source of savings and useful services. If you sign up for Westpac's Premier Advantage Package, at a cost of $395 a year, the standard variable rate becomes 8.32 per cent. For loans of more than $250,000, the rate is 8.02 per cent.
If you are not happy, a change of lender could be a good thing, if history is any guide.
The MFAA - essentially a lobby group for non-bank lenders - reports that 80 per cent of those who shifted in the past six months found the experience satisfying. "About a third of oursurvey respondents who refinanced their loans changed their loan provider and a whopping 79per cent of these people said they benefited from it," MFAA chief executive Phil Naylor says.
"Only 8.8 per cent of people who refinanced with a new provider said they didn't benefit from the move.
"It is a very competitive market at the moment and there can be great benefit in borrowers shopping around and re-examining their home loan provider and product periodically."
The benefits of changing loan providers include lower fees, better services, better loan conditions and lower interest rates.
In the MFAA-BankWest Survey, of the respondents who benefited from changing loan provider:
* 70.4 per cent got a lower interest rate.
* 64.8 per cent got better loan terms and conditions.
* 61.1 per cent got better service.
* 48.1 per cent got a better fee package.
Anyone considering shifting needs to be aware - as always - of the fine print. Matters such as exit fees can complicate what seems to be a lower interest rate.
As Mr Naylor says: "It is important when researching a loan to consider all of these things in combination. It is no good having a low rate home loan if the fees are too high. Make sure you are comparing oranges and oranges when you shop around."
Tim Blue | January 12, 2008
DON'T be too worried about the pain of a rise in home loan interest rates - only a mug would pay the full whack these days.
Shop around and you could get between 50 and 70 basis points - between half and three quarters of a percentage point - off the advertised home loan rate, to chop it back to 8 per cent from the 8.7 per cent the big banks will soon be charging.
With St George and Westpac deciding yesterday to join their rivals at the Commonwealth, ANZ and National, it might seem a daunting task, but there are still strategies to help keep repayments under control.
Start with the old faithful: "Is that the best you can do?" Selling money is like selling anything else: the price varies according to who you ask and how hard you press. Sometimes a bank has excess cash sitting around that it would prefer to have out working in the form of a home loan, and it may be happy to do a deal.
"If a bank says it will give you half a per cent discount on the standard variable rate of 8.7 per cent, or a non-bank lender says it is much cheaper than a certain bank rate, a borrower should say, 'so what?'," Infochoice general manager Denis Orrock says.
"The standard variable rate in the home loan market has ceased to become a meaningful indicator of home loan rates."
Look on a standard variable rate as a starting point for lenders, brokers and borrowers in comparing home loans.
"If you used a broker, go back and ask them to find the best deal in the market. That's their job as a broker," says Angela Sharkey, a spokeswoman for the Mortgage and Finance Association of Australia.
If you used a big bank originally, the pitch still works: find a broker who has a better rate. When the letter arrives from the bank bearing the bad news of a higher rate, you are ready to say you have a mortgage lender prepared to absorb the costs to win your business.
As in all areas of business, competition sometimes is not pretty. From the outbreak of the sub-prime crisis in world financial markets, big banks slung off at the reputation - and lending rates - of the non-bank lenders in an effort to win back market share.
It's a response to the success of brokers, who have taken about 45per cent of the new business in the past 12 months.
A second area of saving arises in the differences between standard loans and basic loans, which are typically half a percentage point cheaper.
You might not need all the features of a standard variable rate loan. Basic loans do the job and most still have the best feature - the facility to make extra repayments and draw-downs if you later want money back.
As an illustration, NAB's standard variable rate has become 8.69 per cent. Yet its so-called base variable rate is now 7.99 per cent, and if you borrow more than $500,000 the rate falls to 7.94 per cent. Westpac's standard variable will be 8.72 per cent, but it has a no-frills first option home loan at 8.14 per cent and a first-home buyer's special offer rate of 8.02 per cent.
Speaking of specials, NAB has a 12-month introductory variable rate of 7.51 per cent, which of course jumps later.
What happens then is the next area to watch. If you are nervous about where rates might go, NAB will do a one-year fixed rate of 7.59 per cent, rising to a three-year introductory rate of 8.19 per cent. The best deal is a 10-year rate at 7.99 per cent.
As Harry Senlitonga of Cannex points out, fixed rates have become very attractive in recent years. Two years ago fixed-rate loans accounted for only 16 per cent of all residential housing lending, whereas as of last November they accounted for 28 per cent of all residential lending.
"Fixed rates can be a touch more expensive than variable rates, but a borrower can look on that as a form of insurance that lets them sleep more easily at night," he says.
Keep an eye on restrictions on how much you can pay without a penalty, and some have larger break costs than a standard variable rate loan. Don't overlook the non-bank lenders. Since August last year when the sub-prime crisis emerged, the big banks have used the global credit squeeze to disparage the reputation of non-bank lenders in a bid to take back market share. "Scaremongering by banks over the impact of the tightening credit market has done the public a great disservice - which is only now becoming obvious," says Lisa Montgomery, head of consumer advocacy at Resi Mortgage Corporation.
"At the time, major banks delivered a barrage of negative comments informing consumers that non-bank lenders would be more adversely affected than banks by the increased cost of funding, which would be reflected in higher interest rates.
"In doing so they gave consumers the false impression that all non-bank lenders will cost them more to borrow - which is simply not true." Incidentally, in the fallout from the sub-prime crisis, Westpac bought the trading name of RAMS, whose most recent rate on a standard loan was 8.82 per cent. Westpac has since cut that to 8.65 per cent.
Professional packages are another good source of savings and useful services. If you sign up for Westpac's Premier Advantage Package, at a cost of $395 a year, the standard variable rate becomes 8.32 per cent. For loans of more than $250,000, the rate is 8.02 per cent.
If you are not happy, a change of lender could be a good thing, if history is any guide.
The MFAA - essentially a lobby group for non-bank lenders - reports that 80 per cent of those who shifted in the past six months found the experience satisfying. "About a third of oursurvey respondents who refinanced their loans changed their loan provider and a whopping 79per cent of these people said they benefited from it," MFAA chief executive Phil Naylor says.
"Only 8.8 per cent of people who refinanced with a new provider said they didn't benefit from the move.
"It is a very competitive market at the moment and there can be great benefit in borrowers shopping around and re-examining their home loan provider and product periodically."
The benefits of changing loan providers include lower fees, better services, better loan conditions and lower interest rates.
In the MFAA-BankWest Survey, of the respondents who benefited from changing loan provider:
* 70.4 per cent got a lower interest rate.
* 64.8 per cent got better loan terms and conditions.
* 61.1 per cent got better service.
* 48.1 per cent got a better fee package.
Anyone considering shifting needs to be aware - as always - of the fine print. Matters such as exit fees can complicate what seems to be a lower interest rate.
As Mr Naylor says: "It is important when researching a loan to consider all of these things in combination. It is no good having a low rate home loan if the fees are too high. Make sure you are comparing oranges and oranges when you shop around."
Comment