28 NovIs the Cheapest Interest Rate the Best Deal for You?

low-interest-rates-cheap-loansIt’s quite normal for many people to hunt for the cheapest interest rate they can find for their mortgage. After all, a lower interest rate can mean lower repayments.

However, with all the hype about cheap interest rates at the moment, it’s easy to get swept up and locked into a loan with a low interest rate that might not end up being as cheap as you first thought. There’s also the problem of chasing cheap interest rates without checking all there is to know about the actual bank product and what benefits it can give you.

Lowest interest rate vs best loan type

Everywhere you look it seems there is a different lender advertising their lowest interest rates. The big, bold advertisements make the rates seem so appealing that many people are tempted to sign up right away.

Before you jump, take a moment to consider whether the lowest interest rate is the same thing as the best loan type for your individual financial situation.  Some banks may limit your ability to make extra payments into your mortgage, especially with some fixed rate loans.

Read the fine print

It’s always a good idea to read the fine print at the bottom before enquiring about any mortgage product you see advertised. In many cases, the lowest rate will be available only to people with a low LVR (loan-to-value ratio).

Many lenders also impose a minimum loan amount you need to borrow in order to qualify for their really cheap interest rate deals.

Fixed or variable

There are also some low interest rate special deals that require you to lock into a fixed term for a number of years. If you plan to sell your home or refinance your mortgage in the near future, you might end up paying expensive break fees to get out of your fixed rate before the end of the term.

It’s also important to check whether the mortgage product you’re considering offers the features you want with your loan. For example, some lenders may not allow you to redraw any additional payments you make while you’re still within your fixed term.

Most lenders also don’t allow you to link an offset account to your fixed rate mortgage, so you could be losing the benefit of offsetting any money you have in savings against the interest being charged.

The best option would be to discuss your options with a mortgage broker. Your broker can give you options from a wide range of lenders to find the right loan type and the most competitive interest rate for your personal situation.

Honeymoon vs ongoing discount

It’s common for some lenders to offer a seriously cheap honeymoon rate that is designed to catch your attention. The idea is that you get a massive discount off the standard variable interest rate for a period of time.

However, when the honeymoon period ends your interest rate will revert back up to the much higher standard variable rate. While the discounted rate might have been nice during the honeymoon period, it’s likely you’ll end up paying far more than you should on your interest rate once it’s gone back to the standard variable rate.

Understand the comparison rate

 Despite lenders displaying their cheap interest rates in big, bold numbers, they always show another interest rate alongside it in much smaller font.  This figure is known as the comparison rate. In most cases, the comparison rate is higher than the advertised special deal.

If you’ve ever been tempted by a really low interest rate in an advertisement, did you ever stop to look at the comparison rate in tiny font beside it? There is a lot of confusion about what a comparison rate actually means.

The comparison rate is calculated by adding together the interest payment and any other fees and charges associated with the loan for a specified loan amount.

At first glance, you might think the special deal interest rate seems low, but by the time you add together any other fees and charges to arrive at the real rate you’ll end up paying, it may not seem so cheap at all.

Fees and charges

If you’re checking out an advertised cheap interest rate, take a moment to consider whether there are any ongoing fees associated with the loan.  A cheap interest rate can suddenly become much more expensive than you thought if you end up paying a monthly fee on your mortgage, plus a monthly bank fee on your transaction accounts.

Package discounts

Many banks offer some sort of package deal, where you package together your mortgage, your bank account, and often a credit card in return for discounts on your interest rates.

The package usually comes with an annual fee of around $395, but most banks will cut the usual monthly bank fees they would have charged on your accounts.  Most lenders will also waive loan establishment fees

The actual discount you receive on your mortgage can vary depending on a number of factors. Your LVR and the total loan amount you’ve borrowed will play a part in the discounts your bank might offer.

Please remember the lowest rate is not always the best mortgage product or interest rate for your financial situation.

Before you give into temptation to sign up for a cheap interest rate you saw advertised somewhere, call Nieuvision on 1300 832 554 and discuss what features of a loan are important to you. Only then are you in a stronger position to find the right loan product and interest rate to suit you.

Karyn Reddick
Loan Manager
e: karyn@nieuvision.com.au

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Disclaimer: We recommend that you seek independent financial and taxation advice before acting on any information in our articles and newsletters. They contain general information only and have been prepared without taking into account your personal objectives, financial situation or needs. We recommend that you consider whether it is appropriate for your circumstances. Your full financial situation will need to be reviewed prior to acceptance of any offer or product. Interest rates are subject to change without notice. Lenders terms, conditions, fees & charges apply.

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