Beware: don’t be dazzled by upfront mortgage deals



Although house prices fell in May, most financial experts agree there has never been a better time to be paying off a home loan.

Property market analytics firm CoreLogic RP Data says its weekly collection of capital city home prices points to a nationwide fall of 0.9 per cent in the month, with the usual seasonal variation in May the likely reason.

CoreLogic RP Data head of research Tim Lawless warned against assuming this is the beginning of a weakening trend.

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“Whether the change in the index’s direction indicates the start of a softening trend across the housing market or is more reflective of seasonal volatility is yet to be seen, however it is clear that in trend terms the housing market remains strong, driven primarily by substantial capital gains across the Sydney market,” he said.

But with interest rates at historic lows, forcing both large and small lenders to compete aggressively for business, and since exit fees were abolished on variable interest home loans taken out after 1 July 2011, customers are voting with their feet and switching lenders at record rates.

Most recently, Commonwealth Bank of Australia economist Michael Workman noted that refinancing comprised about 34 per cent, by value, of all the loans to owner-occupiers at their bank.

The Commonwealth Bank has posted its half-year results.

A third of CBA’s owner-occupied mortgage books are refinanced.

In a bid to lure new customers – or keep existing ones happy – many lenders are offering home loans with rewards, including frequent flyer points, cash incentives and loyalty discounts.

What is the deal?

On first blush, some of these incentive loans look pretty tempting, too.

According to research compiled for The New Daily by consumer ratings service CANSTAR, if you take out a mortgage with the Qantas Staff Credit Union you may be eligible to earn 150 Qantas Points for every $1000 on your loan balance per annum.

Some Credit Union of Australia home loan customers who borrow $250,000 or more after three years will be eligible for a special interest rate loyalty discount, while at the Victoria Teachers Mutual Bank if you borrow $200,000 or more they will waive the establishment fee and annual Rewards Package fee for two years.

New customers who switch their home loan to Newcastle Permanent could score $1000 cash back, while Suncorp is waiving the annual package fee on new package loans for the life of the loan, saving new customers up to $11,250 (savings based on $375 per annum over a 30-year loan term).

But are they too good to be true?

Research manager at CANSTAR, Mitchell Watson, says customers should not use the incentives as a reason for signing up with a particular institution.

And if you are switching from an existing mortgage you need to factor in valuation costs, mortgage discharge fees and new application fees.

“You need to consider the fees of the mortgage and the flexibility it offers – whether there is an offset account if you can make extra repayments – as well as how competitive the interest rate actually is,” Mr Watson says.

“These days, with competition so fierce among lenders, we think if anyone is paying more than 4.7 per cent they are paying too much.

“Some of the smaller lenders have rates at less than four per cent.”

While the added incentives can be a great deal for consumers they should be treated as just the cherry on the top.

“If you are having trouble deciding between two equally good mortgages, only then would you look at the incentives being offered to make your decision,” says Mr Watson.

“They should be seen as the clincher only.”


Don’t be seduced by quick cash. Photo: Shutterstock

Mr Watson said he was concerned the slew of incentive home loans had the potential to lure in customers who haven’t done their homework.

“There is some concern that people will ignore these fundamentals and just go with the headline,” Mr Watson says.

Buyer beware

Senior Executive Leader of ASIC’s MoneySmart, Miles Larbey, has similar reservations, and says it’s crucial consumers read the fine print before being tempted by incentives.

“You need to realise that this is first and foremost a home loan you are paying off and it’s a long-term commitment so you need to focus on what will be the best deal in the long run,” Mr Larbey says.

“You should really factor in a two per cent rate rise in repayments as well, before you sign up for a mortgage so you have that buffer built in.”

If you already have an existing mortgage but come across a better deal, Mr Larbey recommends you contact your bank directly.

“Put the offer to them and a lot of the time the bank will actually match it,” he says.

And if the raft of mortgages on the market seems far too daunting to understand, or you simply don’t have the time, you could always use the services of a broker.

“Just make sure they are licensed and ask them to outline their fee structure and how they are paid commissions so you can ensure the advice you are getting is in your interest,” Mr Larbey says.

Try MoneySmart’s mortgage switching calculator to work out if you would be better off.

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