All banks will advertise a headline rate, but does that mean you’re actually getting that interest rate?
The short answer is NO. Here’s why…
While the bank tries to attract new customers with low-interest home loans (be it fixed or variable), what most people don’t see right next to it is the comparison rate.
The Comparison Rate is most important because it gives a more realistic view of the actual cost of the loan over the lifetime when all the extras are considered including the fine print advising that the account has ongoing fees that aren’t included in that interest rate.
Here are some examples of the types of fees that can add some significant dollars to the REAL costs of the loan are:
Is it an introductory offer or a fixed term? When the headline rate expires will you be ready to shop your loan around again?
The setup costs on loans can be significantly different, so an extra couple of grand at the start could wipe out the savings provided by the headline rate.
What are the ongoing fees for the loan?
Does the loan offer special features included? For example, a loan with an offset account could save you big money, but if you have to pay extra for that feature, the savings will be negated.
If you’re moving from one bank to another what are the charges to do this? The bank you’re exiting will charge a discharge fee and there will be government fees and charges to pay as well.
So there you go, while the headline interest rate is a great start, taking the bigger picture into consideration could see you worse off because of these extra costs.
The reason these headline rates exist are because banks rely on the customers that set and forget their home loan. Something most of us do. Like most humans, we get complacent and don’t notice the gradual increase in rate until you realise 1 or 2 years later you’ve been paying 1 or 2% more than you should have been!
This is one of the reasons, Urban Money clients have their home loans (and other lending) regularly checked – to see if there are savings to be found. A good broker (one that you know is 100% on your side), will also make sure the type of loan you get will meet your future plans in life so you don’t end up locked in.
So we know the Comparison rate is better than a Headline rate, but is it perfect?
The comparison rate is a better indication that the headline rate but it’s not the be-all and end-all. It doesn’t consider interest rate changes or variations to your home loan etc. It’s still based on people who have a home loan for 25-30 years and don’t change anything, yet so many things actually do change in that time period. Most home loans are amended every 5 years or so, but we say even that’s too long to make sure you’re getting lifetime value.
Calculate the actual rate or incorporate all these costs over a 3-5 year period and build them into your repayments (remembering if you are borrowing for these fees then there is interest on them as well) to see what you are really paying for.