The home loan market is competitive, and many lenders are fighting for your home loan dollar. Offers come thick and fast across the board, from big banks to credit unions, and the cashback offer is the latest way they are trying to lure you from their competitors. But it is crucial that you do your homework about whether the entire package represents a better deal for you.
Here are some things to consider if you are tempted by the prospect of extra money in your pocket.
What is the interest rate?
For many people, an extra few thousand dollars injected into the household budget sounds pretty good. But if you are not choosing a loan with a competitive interest rate as well – you might be paying much more than this in the long run with interest charges over the term of your loan. You might find a loan with a cheaper interest rate and lower fees (but no cashback) that will save you much more over the life of your loan.
Get some help calculating the total amount you will pay over the loan term. You will need information like the cashback amount, interest rate, establishment fees and loan service fees. You could be surprised at the difference between lenders.
Terms and Conditions
There will often be terms and conditions on cashback offers, so read the fine print before signing on the dotted line.
SOME OF THESE INCLUDE:
- Minimum loan amount
- Application and settlement within a specific time frame
- Specific loan types may only be available with the offer
- The lender may require you to open a bank account with them to receive the cashback offer
- You may need to sign up for their home loan package, which carries an annual fee
- You may have to put up a bigger deposit to be eligible.
- You may be required to keep your loan for a specific period.
The cashback value may depend on how much you are borrowing, and you might not be eligible if your loan amount is less than $250,000.
Lenders often have an expiry date on offers like these, but take your time and make a decision after considering all the factors.
Features and Benefits
There are many ways to determine if a home loan is right for you. Features and benefits are a great way to start. It is imperative to assess each loan and its suitability for your needs. There is no point in accepting a cashback offer if the loan type will not meet your needs now and in the future.
Do you need flexibility with repayments?
Are you looking for a fixed or variable rate?
Do you need to redraw or offset options?
Taking a ‘fix it and forget it’ approach with your mortgage could cost you thousands. Your mortgage is a long-term commitment. During your home loan tenure, your personal and external circumstances could change significantly. You may want to increase your repayment size in the wake of a pay hike, or you may wish to close your home loan sooner by putting in funds from a windfall gain. Whatever your motivation, refinancing gives you the flexibility to take charge of your mortgage. The most significant and obvious benefit is the instant funds refinancing adds back into your budget, leading to an immediate increase in your purchasing power. To make the most of refinancing, you must, however, ensure that you switch to the right loan. While there are undisputedly multiple factors you need to keep in mind while refinancing, here are three critical aspects we believe every borrower must consider before making a switch.
1. Loan Tenure
Most borrowers tend to be influenced by a low rate while switching. Considering the tenure of your new loan is just as important. Switching to a lower-rate loan with a longer-term could leave you financially worse off in the long run. Here is an example. Let’s assume you have a home loan with an outstanding loan amount of $450,000 remaining. When you took the loan out six years ago, it had a tenure of 25 years.
You are now only 19 years away from paying your loan off. Further, the current interest rate on this loan is 3%, with no ongoing fees. Under this facility, you would be paying around $2,592 per month. Now, let us assume you refinance the $450,000 loan to another loan with a 3% interest rate, but for a 30-year loan term. The new repayments are $1,897 per month. It looks like a significant savings of almost $700 per month! Unfortunately, you are financially worse off in the long run. Your immediate cash flow has improved, but this is costing you more interest. How is this possible if the interest rate is the same? In this example, the existing loan is much cheaper in the long run, with only $140,915 in interest payable. Extending the loan to a new 30-year term adds over $92,000 to the total interest bill. This can be the case even if the interest rate is lower.
2. Flexibility in Repayment size and frequency
Increasing your repayment size or your repayment frequency, or both give you the ability to pay off your loan faster. Opt for a loan that lets you benefit from positive changes in your financial circumstances. The most common repayment frequencies are weekly, fortnightly and monthly. Weekly repayments are most effective in closing your home loan faster. As mentioned at the beginning of the article, you may want to make larger repayments on account of increased income or may want to put in funds from a sudden inheritance. By closing your loan sooner, not only do you expedite property ownership but also pay for lesser interest through the life of your loan.
3. Loan Features
Loan features like an offset account, split loan options and redraw facility are crucial for savings and quickening homeownership. Understand how each of these features works and how they apply to your circumstances. If you find it challenging to do this, engage ASA Mortgage Brokers to help you out. Brokers get paid by lenders on the settlement of a loan, and their services are usually free for borrowers. Mortgage brokers are legally bound to advise you in your best interests duty.
In a nutshell, the lowest rate offering may not be the best option for you. Ideally, you should aim at balancing long term and short-term benefits of refinancing. The most straightforward approach to this is to rely on professional guidance.
To discuss your home loan needs, contact ASA Mortgage Brokers today to book your FREE consultation appointment.
The information is a compilation from various sources for your benefit and should not be relied upon instead of appropriate professional advice. This article is prepared based on general information. It does not consider individual financial objectives or needs and is not financial product advice, and the content is quoted from the Yellow Brick Road Blog.