Why the best home loan may not be the cheapest

Posted by Nikhil Pandey on October 13th, 2016

Falling interest rates have brought housing loans back into the spotlight and many borrowers are even considering changing lenders to take advantage of what may seem to be an even cheaper rate.  Unfortunately it is not as simple as it sounds.

Even if you did find a friendly bank you will almost certainly end up confused as there are now more than a thousand different home loan products in the market. Sorting through them is just as tricky as working out which phone plan is best for you.

A useful guide is the comparison rate sheet that all lenders are required by government legislation to display, but keep in mind that it is only a starting point. Even though it includes the basic loan costs such as set up fees, interest rates and ongoing charges, it does not include bank fees that are only charged in certain circumstances. These include fixed loan early termination fees and redraw fees.

But there is more to a best home loan than the interest rate and the fees and charges. One of the most important things to consider is flexibility. Now you might believe that a no-frills loan with low fees is perfect for you right now because your affairs are simple and your present intentions are to stay in the one house for many years, but keep in mind that change is always with us and your present loan may not be appropriate if things change.

What happens if you decide to move house, or borrow some money for renovations or investment, or need to reduce your repayments while the kids are at high school? If you have one of the no-frill loans it generally won't have a redraw facility and you may be required to take out a second mortgage for the extra money. Naturally the bank will be looking for a higher interest rate on the second mortgage.

Offset accounts are a highly desirable feature. If you deposit money in a normal interest bearing account you will probably earn less than 1.5 per cent a year. However, when you deposit money in an offset account the notional interest credited should be the same as that charged on the housing loan.

But it gets even better; instead of being credited to your account and leaving you liable for tax, the interest is taken off the principal on your non-deductible best home loan. Therefore funds in an offset account earn you the same as the loan rate (currently around 5 per cent) after tax.

You can put offset accounts to good use if you intend to change residences and retain the old one. This is because you can build up funds in the offset account instead of paying them off the housing loan. There is no difference in the interest costs, as the offset account is credited at the same rate as being charged on the housing loan, but there can be a huge difference when you decide to make the move.

http://www.smh.com.au/money/borrowing/why-the-best-home-loan-may-not-be-the-cheapest-20160721-gqaenq.html