Treat Honeymoon Offers With Caution

Home loan customers should be wary of lenders offering interest rates significantly below the standard variable rate, according to leading mortgage broker Loan Market.

Loan Market Corporate Spokesman Paul Smith said consumers seeking the most competitive home loan product should check the comparison rate but more importantly evaluate the overall cost of the loan compared to their individual circumstances.

Mr Smith said in the current highly competitive lending environment there were lenders advertising variable rates 1-1.5 per cent lower than most bank standard variable rates.

“Consumers need to tread carefully though as these rates may have honeymoon periods and it is usually not a true barometer to measure the cost of the loan over its lifetime,” he said.

“By law, each advertised interest rate must show a comparison rate alongside any time credit that is advertised.

“While the comparison rate provided alongside any advertised rate attempts to weigh one product against another in a transparent and even-handed manner, it too can have shortcomings.”

Mr Smith said advertised comparison rates may not accurately reflect what a borrower is actually paying during the time they hold a mortgage.

“An advertised comparison rate is calculated on a 25 year period and at a loan size of $150,000, but this is well below the average loan size and duration for home owners inAustralia,” he said.

Mr Smith said the differences between advertised rates and comparison rates can be quite substantial as well.

“Many advertised rates have honeymoon periods where the borrower enjoys a lower interest rate before the rate reverts to a higher level after a certain time period,” he said.

“These products can be beneficial to certain borrowers, but a mortgage is generally not a product you will have for only a honeymoon period.

“The best thing for a borrower to do is to look at the amount the want to borrow and then look at the details of a particular product.”

Mr Smith said that a good place for a consumer to receive expert guidance was from a mortgage broker.

“At the end of the day, a mortgage broker is well placed to guide a customer who is confused about the interest they would pay over the life of the loan. In most cases this guidance is given for free and is always completely transparent.”