What’s more important, getting the cheapest rate or the best deal for your next loan? For most people the answer would seem obvious, the cheapest rate, right? Well, the truth is that’s not always the case. In fact, the cheapest interest rate might actually end up costing you more in the long run, so it’s important to consider all of your options carefully.
Some reasons for a cheaper interest rate costing more include:
Additional fees and charges
While you might think you’ve just scored a great rate and want to rush in and secure it, it’s important to take some time and have a close look at the lender’s terms and conditions before you commit yourself to a loan that might not be what it seems at first glance. While the interest rate might be a fraction of a percent lower than the other competitor’s offerings, additional fees and charges can quickly make up for any cost savings, so much so, they cancel out the benefits of the lower rate. So make sure you factor these costs over the life of the loan to ensure there is a benefit to you.
Variable vs fixed rates
There are two types of interest rates to consider when looking to secure a loan, they fixed and variable. Both have their pros and cons. Having had such a low cash rate for so long in Australia, when the reserve bank recently started lifting rates the resultant effect saw borrowers make a mad rush on lenders to secure fixed interest rates for their loans. A move largely designed to hedge their bets against anticipated rate rises in the coming months ahead. But is this a smart move? Securing a fixed interest rate means you know your repayment amount will never change for the term of the loan period, which can be a huge advantage when it comes to budgeting and peace of mind. Especially during a period of market instability which could likely see variable rates surpass your fixed rate. However, you also run the risk of variable rates being reduced over the term of your loan to the point where they are lower than interest rate you had fixed. Borrowers can then find themselves paying more for their mortgage repayments, and depending on the length of time remaining on their fixed rate term, can end up being quite costly. It is possible to exit this predicament, but it will come at a price as break costs can be considerable.
Length of the loan
Generally speaking, home loan terms can include 10, 15, 25, 30 or even 40 year loan terms. 25 and 30 year loan terms are the most common, with 10 and 15 year loan terms generally being confined to interest-only repayments and 40 year loan terms only offered by a small number of lenders.
Choosing to take out a home loan with a 40 year term will have even lower repayments than a 30 year loan term—$1,805.20 on $350,000 loan with a rate of 5.50% compared to $1,987.26 with a 30 year loan term, or $2,149.31 on a 25 year loan term. It’ll also come with a much larger interest bill—$516,496 vs $365,413.60 on a 30 year loan.
Even if you have a longer loan term, you may be able to make additional repayments or make use of repayment strategies which decrease your loan term. Making additional repayments or lump sum payments, or splitting your monthly loan repayment into fortnightly payments can see you pay your loan off in a shorter time period.
Refinancing mistake: refinancing to a lower interest rate and not adjusting your loan length
One mistake to avoid is refinancing to a cheaper interest rate and taking out a new 30 year term. This can erode your refinancing savings, as you can see below.
| Original loan | Refinance after 5 years | |
| loan term | 30 years | 30 yrs (which means a real overall loan term of 35 yrs) |
| loan amount | $300,000 | $281,470 |
| interest rate | 6.70% p.a. | 5.70% p.a. |
| monthly payment | $1,936 | $1,634 |
| total interest payable | $396,900 | $404,266
($306,645 in interest from the point of refinancing) |
| interest saving | $7,365 |
* based on monthly, principal and interest repayments
At the end of the day, if you’re weighing up which loan you should go for but aren’t 100% sure which is the right one for you that’ll offer the lowest overall cost, remember one thing: make sure you’re comparing apples with apples.
Talk to us about finding you the best finance deal for you
At Capital Mortgage Group, we’re here to provide our expert assistance to ensure you’re getting the right loan option to suit your specific needs. Backed by solid, qualified experience in the finance industry, we’ve built up a huge network of lenders in both the private and mainstream lending space ensuring we can find the right loan for you.
To find out more about what we can do for you give us a call on 1300 758 379 to discuss the next steps in your loan application!
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