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Why the lowest home loan interest rate may not always be your best option

We’ve probably all done it – spotted a bargain, then been slugged for "extras" when it’s time to pay. All of a sudden, that bargain isn’t quite so attractive.

The same thing can happen when you’re looking for a home loan: you spot an attractive interest rate and dive right in. But then you discover the fees are high or perhaps the lender service is far from customer focused.

In our experience, the lowest rate doesn’t always mean the most appropriate loan product for you.

Let’s take a look at what else matters.

1. Fees can sneak up on you

A low interest rate might look great on paper, but what about the other costs? Some loans come with:

•    Upfront application fees: These can vary considerably between lenders.

•    Ongoing monthly or annual service fees: They might seem small, but they can add up if the overall loan features aren’t truly benefitting you.

•    Break or exit costs if you leave the loan early: Generally, these aren’t too bad, but there are some instances where costs can be quite considerable (breaking a fixed rate term for instance) so it’s always worth checking before jumping lenders.

These can all add up – fast. A loan with a slightly higher rate but fewer fees might actually cost you less over time.

2. Loan features make a difference

Some loans come with features that can help you pay it off sooner, and their benefits well outweigh their costs. These can be features like:

•    An offset account (a transaction account attached to your loan that helps reduce the interest you pay over the life of the loan).

•    A redraw facility (access to any extra repayments you’ve made).

•    Extra repayments: Can you make extra repayments without penalty? This is important if you want to pay off your loan faster and save on interest.

•    The ability to split your loan between fixed and variable interest rates.

These features can give you more control – and potentially save you thousands. A basic loan with no extras might not always be worth the lower rate if it doesn’t fit with how you'd like to manage your money.

3. Fixed, variable or both?

A loan might have a cracking rate – but is it fixed or variable? 

Fixed rates give you certainty – you know exactly what your repayments will be. But they can be slightly less flexible. There is usually a limit to the extra repayments that you can make during the fixed term, and there might be break costs if you want out early (these can be based on interest rate movements and the remaining fixed period).

Variable rates move with the market. They can go down (yay!), but they can go up too (boo!). They’re usually a more flexible loan option though when it comes to additional repayments and break costs.

Some people go for a mix – part fixed, part variable – to get the benefits of both. So we would want to make sure your chosen lender allows this option.

4. Your situation matters too

Think about your life over the next few years. Perhaps you're planning to:

•    Start a family

•    Change jobs

•    Renovate

•    Move again at some stage

The right home loan should work with your plans, not against them. A low-rate loan that’s hard to change or exit could cost you more if your situation changes.

The bottom line

Yes, interest rates definitely matter, but they’re not the only thing to consider. It’s a great idea to look at all the options and features, to make sure any loan and lender you choose is the most financially beneficial one for you. The best outcome is a great low-interest rate and the features that support you in your financial growth.

Feels like a lot to take in? You don’t have to figure it all out on your own. Sky Blue Finance, as a licensed mortgage adviser, has been helping home buyers make sense of what’s best for them for over 10 years. Whether you’re buying your first home or refinancing your fifth, we’re all about giving you honest advice and the right support – minus the jargon.

If you need help finding the most suitable home loan for you, get in touch with us and we can discuss the options available for your current position. An initial chat could help find you a home loan that truly works for you – and not just one with an eye-catching rate.

📞 Call Peter on 0414 602 491
📧 Email Peter at info@skybluefinance.com.au

Note: The above information is general in nature and does not constitute personal financial advice. It has been prepared without taking your unique objectives, financial situation or needs into account. You should seek your own independent advice as to whether or not this information is appropriate for you.

Image: Ivan Samkov via Pexels