Why the cheapest loan isn’t always the best

September 20, 2019
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All things being equal, a mortgage with a lower interest rate is better than one with a higher rate – but all things are rarely equal.

Opting for the lowest-rate loan could end up costing you more in the long run, or make it harder for you to manage your repayments. That’s why it pays to look at all the fees and features of a product before making a decision.

Here are some of the reasons why cheap loans aren’t always all they’re cracked up to be.

A low-rate loan might have a long approval process

The time it takes to have a mortgage application approved can vary greatly from lender to lender.

If time is of the essence, a faster lender with a higher interest rate might be more suitable than a slower lender with a cheap loan.

A low-rate loan can still have high fees

Aside from interest, there are various fees associated with taking out a home loan that can significantly impact the total loan amount. Some of the most common fees include:

  • Application fees
  • Settlement fees
  • Annual fees
  • Redraw fees
  • Break fees (for fixed-rate home loans)

While a low-rate home loan may appear to be the cheapest option, if it comes with high fees, it might end up costing you more in the long run than a higher-rate loan with lower fees.

A low-rate loan might lack useful features

Cheap home loans are sometimes cheap for a reason – because they lack certain features that might make it easier for you to manage your loan. These might include:

  • Offset account – so you can reduce the interest you get charged
  • Redraw facility – so you can ‘borrow back’ money you’ve already repaid
  • Extra repayments – so you can make additional payments to pay off your loan faster
  • Repayment holiday – so you can temporarily pause your repayments or reduce their size
  • Option to split – so you can attach a variable rate to part of your home loan and a fixed rate to the rest of your home loan
  • A higher-rate loan with useful features could help you reduce your total repayments and give you more flexibility in paying off your home than a basic loan with a cheap interest rate.

    Some low-rate loans may not be available to you

    Keep in mind that lenders have varying criteria for assessing applications and deciding how much interest to charge.

    All lenders are likely to look at your credit rating, employment history, spending habits, loan size, LVR (loan-to-value ratio) and intended property purchase. But they’ll analyse them in different ways.

    So while cheap loans might look enticing, if you don’t meet the lender’s criteria, you might be given a higher interest rate, or declined altogether.

    Seek professional advice

    The moral to the story is that the cheapest loan isn’t always the best loan. Sometimes, a mortgage with a higher interest rate will offer better value.

    Seeking professional advice is always a good idea. Mortgage brokers like Onar Serrano, Christian Stevens and Mark Fitzpatrick can help you find the best home loan for your situation.

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