Before you apply for a home loan that seems too good to be true, make sure there are no unforeseen strings attached.
In Australia’s highly competitive mortgage market, lenders are always looking for an edge to make their loan seem attractive. From interest rate discounts to waived fees and unique promotions, such as the ability to earn Frequent Flyer (FF) points, there are a wide range of offers that lenders use to entice new customers.
In many cases, home loan offers come with catches or strings attached, and if you don’t read the fine print, it may mean that you wind up with a mortgage that’s not right for you.
Here are some things to be sceptical of with home loan deals:
New customers only
When a lender announces a home loan with an interest rate substantially lower than the competition, it’s easy to get excited. Even a cut of 0.5 percentage points could save you tens of thousands of dollars over the life of your loan, so it can be tempting to try and snap up the low interest rate as soon as possible.
What many customers fail to realise, however, is that this reduced interest rate is for new customers only. This detail is usually hidden in the fine print attached to the deal, so if you’re an existing customer looking to refinance to a more affordable loan, make sure you’re aware of all the terms and conditions attached to your lender’s rate offer.
In addition, some promotions are only available to customers who are refinancing from another lend. Again, some deals aren’t offered to existing customers.
Another potential mortgage trap is the introductory interest rate. You’ve probably seen ads for these types of loans: they offer a very competitive interest rate that might be 0.5 percentage points or more below what most other banks are offering, allowing you to enjoy substantial savings on interest repayments.
Unfortunately, some people fail to realise that this interest rate is only in place for a limited introductory period, usually 12 months. Once the first year has passed, the loan reverts to the lender’s standard variable rate, which may not be the best rate available and could end up costing you a significant amount of money over the life of your loan.
Before you apply for an introductory rate home loan, make sure you’re aware how long the introductory rate applies for and what the interest rate will be once the discount period ends.
Low LVR / large deposit required
When lenders market a loan with a low interest rate or other useful features, they focus on the main selling point and omit the specific details. Another common catch with home loan deals is that they are only available to borrowers who have a large deposit saved – in other words, they’re only offered on low loan-to-value ratio (LVR) mortgages.
For example, you may need to have a deposit of at least 40% of the purchase price in order to qualify for a low interest rate or have your annual fees waived. With this in mind, the advertised deal may only be accessible by a small portion of borrowers.
Before you apply for any type of home loan, make sure you’re aware of all the fees attached to your mortgage. While most people are aware that annual fees and monthly account-keeping fees may apply to a home loan, there’s a whole range of other fees to be wary of.
There could be application or establishment fees, legal fees, valuation fees, discharge fees and settlement fees. If the loan comes with an offset account, does it attract an extra annual charge? If you want to use the redraw facility, will you need to pay a fee in order to do so? If you like receiving paper statements in the mail, will the lender charge you extra for this?
Hidden fees can quickly add up and soon outweigh any benefits you might be able to enjoy thanks to a reduced interest rate or flexible loan features. Remember to check the comparison rate of each home loan you are interested in to check whether or not it offers value for money.
Additional repayment restrictions
If you get a bonus at work or unexpectedly come into some extra money, putting those funds towards extra home loan repayments is a good idea. But don’t automatically assume that this practice will be approved by your lender.
While some variable rate loans provide the flexibility to make unlimited additional repayments at any time without penalty, others do not. You may need to pay a fee when you make extra repayments.
With many fixed rate loans, you’re not allowed to make any extra repayments at all during the fixed rate period. Other lenders may impose a limit on the amount of additional repayments you are allowed to make each year, for example, $10,000. Exceeding this amount could once again result in a hefty fee.
If you want to be able to make extra mortgage repayments whenever your finances allow, make sure to check whether you will be allowed to do so under the terms and conditions of your loan.
Another restriction commonly imposed on home loan deals is the need to open a linked account with the same bank. For example, if you want to access a home loan with a low interest rate, no ongoing fees and a host of flexible features, you also need to open a transaction account or credit card account with the same bank.
That other account might come with high transaction fees or monthly service fees, which can end up counteracting the financial benefits you receive from the mortgage.
Move all your banking
In order to access the benefits of a home loan, some lenders may make it a requirement for you to transfer all your banking services to them: your credit card, your transaction account, your savings account — everything.
You should be very wary of doing this — just because the lender has a great home loan doesn’t mean you’ll be better off financially if you move all your other banking products over to them. Shop around and compare your options before deciding on the right provider to handle each of your different banking needs.
There are plenty of other restrictions that might prevent you from accessing a home loan deal you’ve seen advertised. For example, the deal might be for investors or owner-occupiers only, for high-income earners only, or for some other special type of borrower. Make sure you know all the terms and conditions attached to a home loan before you apply.
Why do I need to avoid mortgage traps?
The biggest risk with these mortgage traps is that you will end up with a home loan you cannot afford to repay. This can lead to significant financial difficulty and hurt your borrowing power for years to come.
Even if you end up with a loan that you can afford to repay, it could end up costing you tens of thousands of dollars over the life of your loan. From hidden fees to high interest rates that kick in following a honeymoon introductory rate, failing to thoroughly research a loan before you apply can have huge implications for your financial health.
Remember that every time you apply for a home loan, the application is recorded in your credit file. So if your mortgage application is refused because you don’t satisfy the lender’s criteria — for example if you are not a new customer or if you’re an investor instead of an owner-occupier —this will go down as a black mark in your credit file and be viewed in a negative light by other lenders in the future.
How to avoid mortgage traps
- Read the fine print. Choosing a home loan is one of the most important financial decisions you will ever make, so don’t rush it. Make sure to read all the documentation and fine print attached to the loan to find out about any terms, conditions and hidden fees.
- Check the comparison rate. Instead of looking at the interest rate on your loan, check out the comparison rate. This rate is designed to show the true cost of a home loan by taking into account any additional fees and charges that apply.
- Look past rates. There are several other factors you should consider when choosing a loan rather than just looking at interest and comparison rates. For example, is the lender a home loan specialist? Do they have a good reputation for customer service? How long have they been operating as a lender? How easy to use is their internet banking portal? Check out customer review websites to form a clearer picture of a lender’s attributes.
- Be aware of the cost of breaking a fixed term. If you want to get out of a fixed rate loan to access a lower variable rate, be aware that expensive break costs will apply.
- Use loan repayment calculators. If you’re not sure whether an advertised home loan deal will save you money, online tools such as our home loan repayment calculator can help you work out the potential savings.
- Ask a mortgage broker. Mortgage brokers are home loan experts and can help you find a great home loan deal that matches all your borrowing needs. Don’t hesitate to ask a trusted and experienced broker for help.