Lowest rate not always the cheapest

The lowest home loan rates in living memory are now on offer after yesterday's half-percentage point cut in official interest rates. However, borrowers should understand now more than ever that the lowest interest rate does not necessarily add up to the cheapest loan.

Ongoing fees along with any flexible features attached to a loan package, and how they're used, go a long way in determining the total cost of a loan over its full term.

Introductory or honeymoon-rate loans are often the lowest but revert to standard rates after six or twelve months. Next come basic variable or ‘no frills' rate loans. The lowest currently on offer is Wizard's 5.64%, followed by HomeLoans Ltd at 6.15% and ANZ's Money Saver at 6.22%.

While these loans will suit some borrowers, often they come with higher monthly fees and less flexibility on things like making extra repayments and redraw of those payments. Features like these can be used to cut thousands off the total interest paid over the course of a loan.

Generally standard variable rates are around 1 percentage point higher than the ‘basic’ rate but come with the extras and lower fees, if any. The major banks' variable interest rate now stands at 6.82% while the lowest ‘full feature' variable rate home loan is offered by Resi Mortgage at 5.85% followed by HomePath at 5.9%, then Melbourne Credit Union and MCU Direct at 6.1%.

We always advise borrowers to look beyond the headline interest rate, consider the long term cost of borrowing and choose a loan to suit your needs and circumstances.

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