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Q&A - Low rate home loans

Q. I have come across a Bankwest home loan that is capped for three years at 7.5%. It also starts at 5.4% and I am trying to work out what can go wrong with a loan that sounds too good to be true. I think I recall you saying that if something sounds to good to be true it probably is. 

A. You’re absolutely right with my warning but sometimes there can be exceptions when a financial institution like Bankwest is trying to build market share. 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. Make sure the loan offers things you might want like redraw facilities, so you can pay more into the mortgage but can redraw the money if you need it. Look at the best loans in the market that suit you then compare it to the Bankwest loan or get a mortgage brokers to do it for you. That’s where these guys and gals are really skilled. Looking at the main offerings with the loan, you can see that if interest rates go above 7.5%, you have pulled the right rein. Unlike a fixed rate loan, you don’t pay the higher fixed rate 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%, if it does inside the three-years, then you will benefit as your loan peaks at 7.5%. In the 1980s there were borrowers with a capped loan that peaked at 13.5% while others saw their loans go to 17% and more! With this loan, when the cap period ends, you would, in many cases, have to migrate to a higher rate but as long as you understand that, it should be okay. The best advice is to get some external advice to ensure the loan suits you but on first blush it looks sound. By the way, Bankwest is now owned by the CBA, which gives it a lot more solidity. 

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.

Published on: Monday, September 21, 2009

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