Lending changes, lack of home loan knowledge holding borrowers back

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As lending protocols tighten and home loan product offerings increase, borrowers with a poor understanding of home loan features are at risk of costing themselves money and financial flexibility.  

According to the latest edition of the Savings Intentions and Behaviours Report from ME Bank, just 13% of consumers utilised a home loan offset account to help them achieve their savings goals in the six months to December 2015, a fall of 1% compared to the previous six-month period.

Lino Pelaccia, mortgage broker and general manager of ME Bank, told Your Investment Property Magazine’s sister publication Australian Broker that he was taken aback by the lack of knowledge Australian consumers have around the features available in today’s mortgage market.

“It’s surprising more Australian’s don’t understand common home loan features that could help them save them money,” Pelaccia told Australian Broker.

“Offset accounts could save borrowers thousands over the life of the loan, yet less than half (45%) of the population has a full understanding of them, according to ME research,” he said.

As a relatively contemporary feature of home loans, Smartline mortgage broker Scott McCray said many borrowers ignore options such as offset accounts, preferring to focus on the simpler aspects of their mortgage.

“Offset accounts first appeared in the professional packages offered by lenders. The packages included your loan, the offset account and a credit card usually. A lot of people just looked at that and thought it was all unnecessary,” McCray said.

“People still have that mindset that they want a home loan and that anything else is extra. A lot of people still just look at the interest rate on offer and let that guide their decision,” he said.

 While Pelaccia said a lack of financial knowledge can mean people end up paying more over the life of their loans, McCray said it can also severely hamper future investment opportunities.

“A lot of people start off thinking they just want to buy a house and go in to a bank and take out a loan and then just commit to paying that down with no thought of what might happen in five or 10 years.

“You never know, you might be required to move interstate and buy a new home or decide you want to start investing, but the loan you took out to begin with doesn’t have the structure that really suits that.

“The example I use is a couple borrows $500,000 to buy and apartment and pays the mortgage down to $200,000. They then decide they want to buy another to move into and rent out the apartment and use the equity they’ve built up to do so.

“But by doing that they’ll end up with a $200,000 loan on which the interest is not tax deductible. Where as if they had poured the money into an offset account tied to the original loan, they could use that as a deposit to buy the second property and refinance the original loan as an investment loan and claim the interest off that.”

With McCray recommending people keep scenarios such as that in mind, combined with recent changes in lending policies, he believes it’s more important than ever that people seek out professional advice.

“It’s a lot more complicated than it used to be and looking online or and what the banks advertise isn’t going to allow people to find the right loan and structure that suits them.

“Brokers know the policies of the lenders, they know which lenders are more likely to take on investors at any given time. I really don’t think it’s possible these days for people to really get the best deal for themselves just Googling something or walking into the bank."

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