Sep 07

A cheap home loan may not necessarily be the best one for you

Published in mortgage brokerhome loan financehome financecheap home loan by Vicky Edema
I was at a BBQ on the weekend and a borrower friend was telling me about this terrific home loan finance he had just arranged through a mortgage broker. Another mate said that he didn’t see the need to use a mortgage broker because he simply applied directly to a lender who was advertising a cheap home loan deal. Well, that was 6 months ago and when I bumped into him recently he was seething. He felt he had been duped by his bank when taking that cheap home loan. Why? The cheap home loan gave him no flexibility and because it was on a variable rate basis the lender had increased the interest rate only 4 months after he had settled the so-called cheap home loan. The guy was furious. He had believed the banks when they told consumers that the global credit crunch would only have a limited if any impact on their lending. I remembered the huge advertising dollars being spent on this message at the time and wondering how any financial institution could be immune from the global credit crisis. Anyway, I was able to explain to him that I had followed the recommendation of the friend at the bbq and used the services of a mortgage broker to find the best home loan for me.

I was very happy with my home loan finance. Firstly the bank with whom I held my home loan and a small investment loan had the debt combined under one mortgage secured over my house. When I refinanced on the suggestion of the mortgage broker I was told that it was important for me to split the home and investment loans because the ATO would otherwise treat them as “mixed funds”. This meant that if I made any extra repayments to the loan it had to be apportioned between my home loan finance and my investment loan finance. It didn’t make financial sense to pay off my deductible investment debt before I paid off my non-deductible home loan finance. By splitting the loans the tax department considered them separately and I could then apply all my surplus income to the repayment of my home loan finance. Another benefit of the home loan finance arranged through the mortgage broker was the fact that I could split the loan into fixed and variable portions. Incredibly I could also pay off up to $20,000 of the fixed rate portion of my loan without any heavy penalties applying.

One product the mortgage broker told me about was home loan finance with the option of including a capitalising line of credit within the home loan finance package. If you have equity in your home and want the security of being able to access funds in an emergency, this capitalising feature is really worth having. Perhaps you want to take a holiday – if you are below your credit limit then you can say “au revoir” and head off overseas, knowing that there is adequate in the account to make the payments. I f you are taking an extended holiday and renting your home out the mortgage broker could advise you to think about a short term rental. This gives you some income but still leaves you exposed to erratic behaviour by the tenant. In the event that there is an unexpected vacancy, the mortgage broker by including the capitalising line of credit had given you a buffer to future unacceptable behaviour.

So don’t think a cheap home loan is always the best home loan. More often than not you end up paying heaps more once a bank gets it hands on you, it won’t le t go. It wants that interest rate. It wants those on-going fees! It wants to kill off competition so that it can make a bigger profit through increased margins on their home loan finance lending.
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