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With lenders racing to drop rates as fast as they can, some borrowers are being blindsided to the real cost of their loan. And it’s here, argues Kim Cannon,that brokers need to tread carefully…
IT’S HARD not to see the current marketing campaigns of several banks as more an attempt to appear competitive than to actually join the fray and drive interest rates down. What is really worrying is the apparent aim to trade off customers’ lack of understanding of comparison rates. That smells a lot like subterfuge – stinky indeed.
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Comparison rates exist to make it clear to borrowers exactly what a loan will cost. It removes the ability of lenders to offer an incentive interest rate for a short term to draw customers in, only to revert to a higher standard rate after the honeymoon is over, without the customer being aware of the extra cost from the time they sign their loan documents. It empowers the customer to make a legitimate comparison between loan products, and, therefore, an informed choice.
For the unwitting, this latest round of discounts looks like a deal one might consider – an interest rate low enough that you’d expect to see it from a non-bank lender, coming from one of the country’s well-known banks. It’s a sad indictment on the state of the market when what looks like actual competitive behaviour from a bank generates a buzz. There is even mounting commentary about interest rates with a three in front; the customer could be forgiven for thinking this is actually what they will pay for their loan.
Sure, taking up one of these loans might be a good plan if the customer goes into the deal with their eyes open and only intends to stay with the loan for the lower rate period then refinance, but the banks rely on apathy or ignorance to retain customers beyond the end of the honeymoon period.
It should be top of mind for customers that every additional 0.25 per cent in interest is worth about $73 a month in higher repayments for a $350,000 home loan. That adds up to an extra $875 each year and potentially more than $26,000 over a 30-year loan term for this loan size.
The difference between one particular honeymoon rate and its comparison rate currently doing the rounds is around 0.56 per cent, with the honeymoon rate at 4.65 per cent per annum and the comparison rate at 5.21 per cent per annum. It is a given that the extra cost would rise exponentially with a bigger loan.
Another example is a credit union which is offering a fixed interest rate of 3.95 per cent per annum, which sounds too good to be true – and it is! The comparison rate is 5.05 per cent, a 1.1 per cent difference. That is a very big jump in repayments once the honeymoon period expires at the end of the first year.
It still surprises me how many borrowers don’t look at the comparison rate when shopping for a home loan. Ideally, they would ignore the teaser interest rate and gauge the true cost of the loan using the comparison rate. But it’s not a perfect world and this is not an invitation to bank marketers to tailor their campaigns to capitalise on customers’ vulnerability.
It is high time the banks engaged in true competition across the home loan sector instead of just window dressing to make themselves look like they are a real player in the drive for market share. Lenders should strive to differentiate themselves from their competition with the best interest rates, the best products, the best customer service, and customers would be better off.
As for what’s going on at the moment, I hope borrowers remember the old saying – all that glitters is not gold!
