As a mortgage broker the most common question I get asked is ‘what is the best rate at the moment’. But this isn’t the correct question to ask. The correct question to ask is ‘what is the lowest cost loan available at the moment’.
The interest rate is the figure that most people look at to compare lenders. However, there are a host of other fees and costs on top of the interest rate which make up a significant portion of the total cost of the loan. These include:
- Application fees
- Annual fees
- LMI
- Discharge fees
- Refinance costs
- And More!
On top of these fees you need to consider your goals, needs & lifestyle.
For example, one of the common features people request is an offset & redraw account. This is great in principle, however, you need to be willing to move all of your banking – including existing direct debits, salary deposit, etc. – to the new lender. For some people this isn’t practical and therefore you would be better of staying with your existing lender where, even though the rates & fees may be higher, you will be able to utilise offset & redraw accounts for a better overall saving.
A good tip is instead of comparing interest rates is to compare comparison rates. A comparison rate compares all the fees in addition to the interest rate. This will give you a better indication of the total cost of the loan. Keep in mind than comparison rates are typically compared over 25 years, but a good mortgage broker will be able to model comparison rates over your preferred loan term.
Another big aspect to consider is your goals. For example, we recently helped a client purchase an investment property with a 10% deposit. Because of this she had to pay LMI. However, she was purchasing in a high growth area. We compared a few lenders and found a lender who offered LMI that was just shy of $6,000 cheaper than all the other lenders. Though the rate was 0.15% more dearer, the client still went with the higher rate lender as they would save more in LMI costs. This was as she had the goal of refinance the property once she had built 20% equity in the property, which she expected to do so within 2 years. Because this was her goal, we worked out she would save a lot more money paying a higher rate as she would save more on the upfront LMI costs.
In conclusion, interest rate is not everything when it comes to a mortgage. Consider the LMI, fees & other charges involved as well as how the lender will integrate into your lifestyle to better accurately compare lenders.
