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Home loan discounts - what to watch for

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When it comes to home loan discounts, make sure you understand how the short term benefit effects the long term repayment.

Loan comparison rates are a great help, but are only limited to the actual loan costs. Don't forget to consider other features and benefits that may be important - such as a repayment holiday, or offset account.

It’s important to be thorough in your research, and in your understanding of what these home loan discounts can actually mean.
The loan comparison rate

In the past, banks were able to lure new customers with a discounted initial rate - but then attach certain restrictions, and high fees and charges, so that customers (often unknowingly) ended up paying more in the long-term.

In 2003, the federal government stepped in, and passed legislation specifying that all home loan promotions disclosing an interest rate also include a comparison rate (the calculation of which is mandated by the government) which takes into account all unavoidable fees, charges and interest rates over a set period.

Put into context, if a loan provider offers a variable mortgage rate of 4.65% and loan comparison rate of 5.21%, there can be a big difference in the total cost. On a $300,000, 25-year mortgage at 4.65%, the total interest bill is $207,941 but at 5.21% your costs total $237,198, a difference of around $30,000 over the long-term.

A comparison rate gives you the ability to compare the true cost of a loan before you commit to it. However, it’s worth noting that the comparison rate only evaluates the financial aspect of a loan, and doesn’t take into account specific features and benefits that may be important for you - such as the ability to pay down your loan without penalty, or take a repayment ‘holiday’ in difficult times. Do your homework

Take the first step

The law states that in advertising, the comparison rate must be co-located with the promotional rate and given the same prominence. Once you know this, you’re in a better position to make an informed decision about the benefits of an offer, at least from a cost perspective.

One way of assessing an offer is to see how close the two rates are and look for the promotional rates with similar loan comparison rates, remembering that the comparison rate is the one you’ll pay over the life of the loan. If the comparison rate is significantly different from the promoted rate, you will know there is either a step up in the rate, or some fees that add to the cost of the loan you should be aware of.

With home loans, the more you know and understand, the better position you will be in to make a decision that works for you. The most important thing is that you choose something that suits your personal situation.

Remember that a home loan is a long-term investment, and should be treated that way. Don’t forget to review your loan every one or two years to make sure your rate is competitive with other options in the market.
Get the right advice

If you’re interested in learning more, why not have a no-obligation, free chat with a Yellow Brick Road adviser, who can point you in the right direction?

Contact us today on 1800 927 927.

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