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The problem with only focusing on rates

Most peoples aim is to pay off their home loan as possible. The problem is most people focus on the interest rate when looking for a home loan as they assume a lower rate means they will pay their loan faster. Rate is certainly important but there are a number of factors that will impact the overall cost of a loan and how quickly you can pay it off.

Fixed rates
there are some cheap fixed rates available at the moment and it can be very tempting to lock in. The issue with many fixed rate loans is there are limits to how much extra you can pay in over the fixed rate period without incurring penalties. In many cases only between $5000 - 10000 over the fixed rate term.

Say for example you had a $350000 loan and fixed in for 5.3% for 3 years this would mean you could only pay in an extra $64 a week. At the end of the 3 year term the maximum the loan balance would be reduced to $323735.

If instead you had remained on variable for the next 3 years at say an average rate of 6% but could pay in $120 extra a week the loan balance after 3 years would be $315839.

Limited features
Often lower rate products tend to be simpler products and don't have features like offset accounts. An offset account is a transaction account linked to the loan that can assist in accelerating the reduction of your loan.

For example for a $350000 loan with a rate of 5.5% and extra payments of $120 per week could expect to reduce to approx.  $314500 after 3 years.

For a couple on approx. $85000 a year using an offset account with a rate of 6% they could reduce the balance to $277799 after 3 years.  In fact even if the rate was 7% the loan balance would still be $288368 after 3 years.

Mortgage insurance
Many people are not aware that mortgage insurance can vary from lender to lender in some cases the variation can be several thousand dollars. Let's assume there are 2 lenders one offering a rate of 5.8% with a mortgage insurance premium of $5000 the other a rate of 6% with a premium of $3600.
If the premium is added to the loan balance after 3 years you would be $843 further ahead on the higher rate of 6%.

 

Hopefully the above illustrates that rate alone is not the be all and end all when it comes to properly structuring your loan.

 

 IMPORTANT: The examples used are for illustration purposes only and are not a guarantee of a specific outcome and are not specific advice. We recommend you contact us to seek specific advice regarding your situation before making decision with regards to your loan structure.