Lenders are throwing the kitchen sink at borrowers to, well, own the deed to their kitchen sink.
In tough coronavirus times, tens of thousands of Aussies every month now are being enticed by cheap rates and bonuses, but many are not actually getting a better deal.
In fact, lenders are luring mortgage customers SO aggressively that their products can even represent debt traps.
Here are the five biggest refinance ruses… which will end up costing you more, not less.
Trap 1: Bonus bucks
There is up to $4000 in cash backs instantly on offer, but this will NEVER make up for a higher interest rate. You will ultimately pay far more with any such product.
Even with the largest available $4,000 cashback, in just three years you’ll be behind… with a less generous offer of $2,000, you’ll be going backwards within 1.5 years. That’s based on an average $400,000 loan refinanced from 3 percent to one of the competitive rates for a quality product (more in a mo): 2.5 percent.
Trap 2: Seductive honeymoons
Many of the shoot-the-lights-out interest rates today – especially those below 2 percent – are just an introductory rate. You should be thinking, quite seriously, about what happens when the honeymoon is over.
This intro rate is designed to trap you into a higher rate. And look, if you promise yourself you’ll refinance when it ends and you start paying over-the-odds, you could win… but do you trust yourself?
Trap 3: Fake offset accounts
Most cheap-and-cheerful loans you see DO NOT come with real offset accounts and are therefore NOT protected by the $250,000 government deposit guarantee.
This means you could lose any savings that you think you have safely sitting alongside your loan… if the lender goes bust or even if it just decides you are in financial trouble, it could lock up your money.
It’s true. Remember poor ME Bank customers a few months ago? These customers knew their overpayments were sitting not alongside their loan in a quarantined offset account, but directly in it. But they had no idea of the danger…
Any lender can raid your redraw if it thinks you’re not on track to repay your loan or won’t be able to repay it – it’s in the fine print and why you must get a loan with a REAL offset account… to keep your savings 100 percent safe.
(Note that the media and public backlash saw ME Bank reverse the redraw recalculation.)
You can find real offsets issued by what are called authorised deposit-taking institutions. In other words, they are licensed to hold your cash in a separate but linked account (covered by the deposit guarantee).
And one final tip on offsets, which can save you a huge amount of interest if they’re good ones: fixed-interest loans may not carry them or they may not ‘offset’ your savings dollar-for-dollar. Ask.
Trap 4: Longer loan terms
NEVER take out a refinance over a fresh 25 or 30 period. No matter how much lower the interest rate, you will still end up paying a fortune more overall.
To come out ahead, few people realise you must keep your loan term exactly the same. Extending the average $400,000 loan out over 30 years, instead of the, say, 15 years you have remaining, will more than double the interest you pay.
At today’s cheapest, quality 2.32 percent rate (so the loan with the most-competitive ongoing rate and a real offset account – Google it), you’ll pay more than $150,000 in interest over 30 years instead of $74,012 over 15.
And a trap for people who maybe can’t refinance at the moment, because money is too tight for them in the Covid economy…
Trap 5: No interest payments on holidays
NOT paying the small amount of interest that accrues each month you are on a mortgage repayment holiday, is a huge money mistake.
This adds $17,000 to the typical $400,000 loan… and, of course, six months.
So even though a lender may seem generous with the repayment pause, they come out ahead anyway.