Why The Cheapest Loans Are Not Always The Best

January 9, 2017

Why The Cheapest Loans Are Not Always The Best

Interest rates in Australia are beginning to shift once again. While some lenders still have rates at a historic low, others are beginning to raise theirs. Before long, all of them are expected to follow, including the Reserve Bank of Australia, which has not changed its rates since August.

More Borrowers Are Looking for Cheaper Rates

Banks are discovering that people are looking for lower rates on their home loans, and more of them are willing to change banks to get them. Changing banks, however, may not be as simple as getting what you think is the cheapest loan, because this may not be the best loan for your situation.

There are many lenders in Australia and they offer different loan products. This can make it hard to select the best loan because there are more than one thousand different products to choose from.

Comparing home loans can be difficult even though the government requires lenders to provide comparison data. While these documents do provide the more important information, not everything is there. This means that you may miss out on some information that you may need to know, or wish you knew later, such as exit fees on a fixed loan, or fees for redraw.

Look for Loan Flexibility

People often plan to buy a house and live in it for a long time. Sometimes even for the rest of their lives. Life, however, does not always fall into little predictable packages that allow us to know the future. Your needs will change at various times, which means that you need a loan with features that enable you to make changes when necessary.

Although a simple loan may be ideal at the time you obtain it, remember that home loans often last for 30 years. While it is probably ideal when you get it, or if you stay in the same house, there are plenty of things that could happen to make you change your intentions. When that happens, you want a loan that can change with you, without getting a lot of headaches from it.

Problems You May Face

Changing life situations may cause you to rethink about where you live, or how fast you want to pay down your mortgage. If you decide that you need to move into a different house, or that you want to remodel your home, you could discover a problem.

Advantages of an Offset Account

Most savings accounts only offer 1.5 percent interest or less. Having an offset account attached to your mortgage can greatly change this picture. Money put into them will usually draw the same amount of interest that is charged on your home loan.

Another advantage is that there is a tax break, too. Money that you put into an offset account is earning interest. The interest, instead of being taxable, is applied to your home loan and it is used to reduce the principal. Since the interest rate is the same as that of your loan, it is helping you to pay it down, enabling you to pay it off sooner.

Buying Another Home

The value of an offset account can also be seen when you want to buy a new home and still keep the old one. The advantage is that you can build up a large amount of cash in the offset account to match the amount you are being charged each month because the interest rate is the same.

Here is the way it can work for you. If you bought a home for around $350,000 some time ago, and then put as much money as you could into paying off your loan, you might be able to reduce it down to about $100,000 before you need to move. If you kept the first house, you would most likely need to take out a second loan for the cost of the new house.

On the other hand, if you had a $350,000 house, and you put much of your money into an offset account, you would have an entirely different conclusion. Say you put about $215,000 of your money into the account and wanted to buy a new house. You could withdraw the $215,000, and still have a lot of debt left that is deductible. In the first situation, though, you might have only $100,000 left in debt, but then you would need to pay tax on the rent, and the debt would be non-deductible.

Written by Refinancing.com.au


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