Pundits say the Reserve Bank is likely to cut interest rates when it next decides to move them, but retail banks are heading in the other direction.
Late last week, the Bank of Queensland hiked rates for home owners by 0.25 basis points, pushing up monthly payments. Meanwhile, experts say the economy needs to be fuelled up with cuts to official interest rates, not turned down with rate rises. Onlookers strongly suspect the other major banks will follow suit.
All borrowers should consider the effects of interest rate moves. One thing that can help consumers come to grips with the real cost of their loans is understanding the ‘comparison rate’.
“Most people have not even heard of them let alone understand them,” said the founder of Step Wealth property investment and mortgage brokering service, Stephanie Brennan.
“A lot of people think the comparison rate on a loan is the industry average when it has nothing to do with it.”
Put simply: the comparison rate is the true cost of a loan, inclusive of all of the attendant fees and charges, such as annual package and offset facility fees.
Hence, you may see an interest rate in the low 4 per cent range, but the comparison rate is printed beside it, and is decidedly higher, say around 5 per cent.
In recent months, many lenders have dipped below the 4 per cent threshold to offer headline rates at 3.99 per cent, which at first blush would seem like a fantastic deal.
Here is why you need to check the fine print first.
What it means
Under the National Consumer Credit Protection Act, which governs the loan industry, it is a legal requirement for banks and brokers to inform their clients of the comparison rate.
But with so few people understanding the true costs of their loan, it is clear that not all are fulfilling their obligations.
“One of the reasons I started my own brokering service was because I was so dismayed by the lack of good advice out there,” Step Wealth’s Stephanie Brennan, 25, who owns seven investment properties, said.
“They would often not disclose their commission or bring up the comparison rate, which they are obliged to do.”
Furthermore, the comparison rate as advertised on marketing material is often misleading, according to Paul Bevan, mortgage broker at Dream Financial.
“Most people have no idea what they mean or how important they are,” Mr Bevan said.
“Comparison rates are outdated and are based on a loan of $150,000 over 25 years of monthly repayments
“Now, I have not written a loan like that for a very long time. If you are buying a house for $900,000 in Sydney then your comparison rate will look very different.
“That is why it is important to ask a broker or lender to do a comparison rate on your specific loan amount.”
Too good to be true
While variable interest rates under 4 per cent are certainly eye-catching, that does not mean they are the best deal for everyone.
“There are some lenders out there advertising 3.99 per cent but the true comparison rate is up around 5 per cent,” Step Wealth’s Stephanie Brennan said.
“Now that is very misleading for people.”
Furthermore, not everyone will qualify for those exceptionally low rates.
“These lenders price the rate extremely low but it often only applies to people with a loan-to-value ratio of 80 per cent and a loan of more than $750,000,” mortgage broker Paul Bevan said.
“These loans will not be suitable for everyone.”