Be careful with low rates, experts warn

By Gerv Tacadena | 24 Jul 2020

The mortgage rate war continues to heat up with a new lender rolling out a sub-2% variable rate. Experts, however, urge borrowers — both owner-occupiers and investors — to consider other factors first before jumping the gun.

Sarah Megginson, managing editor of Your Mortgage, Your Investment Property, and Australian Broker, said while low rates are tempting, it is crucial to look beyond the headline rate and consider other incentives.

"A low rate is fantastic, but what if their turnaround times have blown out to three months? Or, it might be the case that once you add in package fees, account-keeping fees and other charges, the loan costs you more in the long run than a mortgage starting with a 2," she said.

Loans.com.au recently unveiled an introductory variable rate of 1.99% available for all owner-occupiers. This followed the announcement by Bank of Us, which offers a similar variable rate but only to those residing in Tasmania.

While Loans.com.au offers the lowest variable rate at 1.99%, it reverts to an ongoing variable rate of 2.57% after a year. A two-year discounted variable rate of 2.09% is also available, which reverts back to 2.79%.

Raj Ladher, home loan specialist at Your Mortgage Broker, said borrowers must also consider the comparison rate of a mortgage product rather than relying just on the headline rate.

"In most instances, there are start-up costs, ongoing costs and costs to close down the loan. These fees naturally increase the comparison rate, which illustrates the true cost of the product," he said.

While increasing rates are not likely anytime soon, Ladher believes borrowers must also look into their current circumstances first before making any changes to their mortgage plans. For Ladher, the structure of the loan can, in many cases, be more important than the rate itself.

"If you are planning on selling your property or expecting a lump-sum of cash, a fixed rate would not best suit your needs as fixed rates come with their limitations. Similar reasons could be found with the suitability of a variable interest rate," he said.

Megginson shares the same sentiments. She said with an array of products available for borrowers, it might be best to seek help to allow them to save thousands of dollars.

"Right now, working with a broker is the key to ending up with a product and rate that suits your need," she said.

Shane Oliver, chief economist at AMP Capital, said low mortgage rates are keeping interest costs as a share of household income well below historic highs.

"Low mortgage costs also make the funding costs for an investment property very low," he said.

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