It has been a while since I last wrote a blog. There have been so many changes in the mortgage industry since. Smaller mortgage brokers have been forced out of the industry, a merger of smaller brokers, merger of large brokering firms and brokers expanding their product range from home loans to financial planning or even property sales.
So is the GFC (Global Financial Crisis) over? Well there are opinions and more opinions. What I can see is that people are getting smarter, "street smart" in regards to managing their finances. Buying needs rather than wants. So for those who is seeking to buy a home to occupy, or even an investment property, what are the best ways in looking for the best possible loan?
The good old days when parents who picked a bank generally stays with the same bank their entire life and their children would follow suit. However times have since changed due to phrases like improving shareholders wealth, banks are looking for way to increase profit. The title of the bank manager, a friend for life if now replaced by bank manager who would sell you products to meet their KPIs. But this is ok, so long as consumers themselves need to be more vigilant in seeking out the best possible loan for their own scenerio. Remember everyone has their own unique lifestyles and therefore, my lifestyle might not be the lifestyle of, say my neighbour.
There are now a number of website that consumers can visit to understand more about interest rate, may it be for borrowing or for investing. One such site is www.infochoice.com.au. This site will allow consumers to search for a loan that may suit them, may it be a credit card, personal loan, home loan or investment loan. Once you have this information what should you do next? Well once you have the information, it is important to look and understand what the lenders are offering. If you are looking for the "best" rate, then you will need to read the "fine print" to understand if there are any monthly fees, early penalty fees, annual fess and etc. The "best" rate might not be the best if you factored all the "hidden" costs.
Here is a simple example, say you own a property with a market value of $500,000. The amount that you had borrowed is $400,000 being 80% of the market value. The key to 80% of market value is that, most banks will not charge you mortgage insurance if you borrow 80% or under. So given an interest rate of say 6%, the monthly Principal and Interest repayment is going to be $2,398.20 based on a 30 year loan. This calculation is relatively simple, but here comes the interesting part, say you have a package fee (note: lenders will change this to wealth package, borrowers choice, professional fee, and etc, this is simply a fee to reduce your interest rate or provide you with a discount off the standard variable rate - generally) of $375 per annum. This fee per annum equates to $31.25 per month. So what does this mean? Well the $31.25 plus the month repayment of $2,398.20 equates to $2,429.45 or 6.12% in a true rate comparison. So you are in effect paying 6.12% rather than 6% in interest rate.
So do not think for a moment that a cheap interest rate is cheap. The other factor to consider is the early penalty fee. Early penalty fee is when you want to pay off your loan before the term is up on your loan. Why? because there might be a cheaper product, or you may choose to sell your property or other reasons. Some lenders will charge a percentage depending on how long you held you loan and some would charge a flat fee. Why this fee? Well it is the cost of borrowing or opportunity cost in providing you with a loan. Banks in the early days will have to absorb costs to fund your loan. So read the clause in your contract or ask your broker for the fee. Knowing your lifestyle and when you might discharge the loan, puts you in the best position to understand if this fee is applicable to you.
Imagine, if there were no branches, no back office and no staff to help you out with setting up a loan. The savings would be passed on to the consumer and we will get a cheap loan. There are a couple of banks doing it right now and I have heard both positive and negative feedback. I think that this is really an individual choice do utilise this.
So all in all, my advice is to equip yourself with knowledge. With knowledge you are in a better position to negotiate what you want in a loan. Lenders can only "sell" you what they are approved to sell. A mortgage broker will be able to evaluate most loans and provide you with some guidance to the best possible product for you. Remember, brokers are "sales" people and unfortunately some brokers will sell you loans that pays the highest commissions. Therefore it is important to do your "homework" before seeing your broker.
There are many brokers out there who is willing to "win" over your business. Ask questions and keep asking them. Only when you are satisfied with the answers, then make your decision. I trust that you have gain an insight of how to calculate a simple effective interest rate and how some mortgage broker operates.
