Lowest interest rate loans look good on paper but come at a huge cost later, says KnowHow’s Bushy Martin.
Many property investors and property buyers will often focus on the lowest loan rate, Bushy advised this is one of the biggest mistakes that can be made.
This is because low rate loans bite you later – the look inviting up front, but end up costing hundreds of thousands of dollars more in the long term.
They are used as bait by the banks to attract property investors and buyers.
So if it is not rate, what should you be looking for from your loan?
Instead of rate, look to the ‘3 R’s of Lending’
Instead of the rate, investors should consider 3 R’s of lending – Reach, Result and Risk.
“Reach is your borrowing capacity, Result is the total cost of the loan, and Risk revolves around your chance of getting into financial trouble. So instead of chasing low rates, you should be focussing on optimising your capacity, while minimising your cost and your risk exposure through clever loan structuring,” Bushy said.
“You should also use a savvy finance broker who can revisit your loans every two years and ensure you don’t get caught paying lender loyalty tax, because the longer you’re with a bank, the higher rate and higher cost you’ll end up paying.”
What are interest rates determined by?
Bushy said interest rates are influenced by several factors.
“It’s important to know banks now rate for risk. This means the lower the risk to the bank, the lower the loan rate and more features offered,” he said.
The interest rate, together with ingoing, ongoing and outgoing fees and features offered, are determined by:
Type of loan
- Owner occupier or investor
- Owner occupier rates are generally 0.5%+ lower
Type of Rate
- Principal and Interest (P&I) vs Interest Only
- P&I loans are generally 0.2% to 0.4%
Loan to Valuation Ratio (LVR)
- The lower the LVR, the lower the rate offered
- 70% drop by 0.05%, then extra 0.05% at 60% with lenders with risk appetite over 80% LMI add 0.6%
Loan Amount
- Brackets of 250K, 500K and 750K
Location & Property Type
- Some locations and property types are considered riskier than others, so loan types, rates and costs vary accordingly
Your Occupation & Financial position
- Industries targeted for campaigns eg LMI waivers
What are examples of current low rate investor loans?
By referring to the below examples, Bushy said it can be identified that the lowest rate loans may end up being the highest cost once ingoing, ongoing and outgoing fees and offset features are included.
| $500k Loan, 80% LVR | Connective Select | BOQ | Firstmac | |
| PRODUCT | Variable Offset Loan | Standard 2 Year Fixed **Special** | Solar Basic Loan | |
| INTEREST RATES: +0.5% Investor +0.2-0.4% IO -0.1% 60% LVR +0.6% 90% LVR | 6.13% (variable) | 5.79% two years (fixed) 6.24% 28 years (variable) | 6.09% five years (intro) 7.14% 25 years (variable) | |
| MAX LOAN CAPACITY | $650k | $656k | $760k + 17% | |
| TOTAL LOAN COST | $572,215 Paid out at 29.3 years | $605,211 | $682,465 | |
| COMPARATIVE SAVING | $110,250 | $77,254 | $0 |
Lender rates and offerings also change daily depending on the bank’s loan appetite, so there are more loan variables and options than the combinations on a Rubik’s cube (Which is about 43 quintillion, or 43 with 18 zero’s after it!).
How to find the best value home loan or property loan
The right home loan for you will depend on your strategy, circumstances and goals.
And with an almost endless list of finance products to choose from, it is difficult to know if you’re making the right move unless you’ve got professional advice and support through the process.
An experienced and savvy mortgage broker, like the team at KnowHow, will work with you to help you get clear on your finance strategy, put together a plan and then identify the best loan options for you … helping you avoid getting ‘hooked’ by bank bait or any other trap.
It starts with a no obligation conversation.
Schedule a time to talk to the team at KnowHow now.
