Business News

Too good to be true?

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by Peter Switzer

Despite the fact that a lot of smaller banks as well as non-bank lenders can’t easily access money from overseas and the Big Four banks are dominating home loans, there are some pretty interesting home loan options out there at the moment.

I was asked by a radio station and its listeners to look at a Bankwest home loan that’s capped for three years at 7.5 per cent. It’s currently priced at 5.4 per cent and most people who I come across are trying to work out what can go wrong with a loan that sounds too good to be true.

Do the research

Generally, I argue that if something sounds too good to be true then it probably is, but there can be exceptions and this looks like one. When a financial institution like Bankwest is trying to build market share, they can come out with attractive products like this one. The bank is now owned by the CBA, so that gives the promises in the product a little more credibility.

And while the offer looks pretty straightforward and relatively attractive, the most important issue is that you have to go into this with your eyes wide open after doing your homework.

Dig down

To the details with this home loan: if rates fall you pay less, like any ordinary variable home loan, but if rates should rise, you're guaranteed not to pay more than the capped rate until 10 November 2012.

The variable rate to start with is 5.4 per cent but the real or comparison rate is 5.56 per cent per annum.

(Most loans have embedded fees which means the comparison rate is higher than the rate which is advertised.)

New customers could borrow up to 90 per cent of the property value while existing Bankwest home loan customers may borrow up to 95 per cent of the property value but you would have to pass some tests. This is happening at all banks since the credit crunch.

Check this out

The Bankwest website promises that there are flexible repayment options. You should be clear about this and check out if there are any associated fees for being flexible.

Make sure the loan offers things you might want like redraw facilities, so you can pay more into the mortgage but you can redraw the money if you need it. Look at the best loans in the market that suit you then compare it yourself to the Bankwest loan or get a mortgage brokers to do it for you. That’s where these guys and gals are really skilled.

How caps work

Looking at the main offerings with the loan, you can see if interest rates go above 7.5 per cent you have pulled the right rein. Unlike a fixed rate loan, you don’t pay the higher fixed rate for the time when the variable loan is lower. Basically, your loan would step up with all other variable loans but when the rate busts through 7.5 per cent, if it does inside the three years, then you will benefit as your loan peaks at 7.5 per cent. In the 1980s, there were borrowers with a capped loan that peaked at 13.5 per cent while others saw their loans go to 17 per cent and more! With this loan, when the cap period ends you would in many cases have to migrate to a higher rate, if variable rates have gone higher but as long as you understand that, it should be okay.

Ask this question

One really important questions you MUST ask is: “Are there any breaking costs for leaving the loan early?” Imagine you decide to go overseas two years into the loan to live and you want to sell your house. You need to know if there will be a big penalty. Also, at the end of the loan, say if rates were at 8.5 per cent, some banks might have honeymoon rates of 7.5 per cent for a year, which you could swap to and in that time rates could start to fall. Make sure you know the costs of keeping your options open.

The best advice is to get some external advice to ensure the loan suits you, but on first blush it looks sound. Finally, become a home loan expert, because buying and selling homes could be the biggest deals and the best investments you will ever do.

For advice you can trust, contact Switzer Financial Services.

Important information:This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

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Published on: Thursday, September 17, 2009