How Important Is Your Interest Rate?
Over the years I’ve often been asked the question of how important the loan interest rate is. The answer is quite simple. The interest rate is important, of course, it is, but it’s not EVERYTHING. While there are pros and cons to everything in life, online or lenders offering super low rates can be problematic and have drawbacks that you haven’t considered.
Here are my top 10 reasons why you shouldn’t use the lowest-rate lender:
1. They won’t always keep that rate through the life of your loan. The minute the official cash rate increases, they quickly increase their rates too. This means that they can lure new borrowers in with lovely low rates whilst their existing customers pay the penalty.
2. You as the borrower won’t always have access to a branch or an actual real person to speak to. This convenience has a price. Sitting on hold for 2 hours waiting to speak to a customer service officer has a cost to you.
3. They won’t always have up-to-date technology. Remember that they’re cutting costs at every turn to keep the rates so low, so this means their internet platform may be inferior and your day-to-day banking could be simply harder to deal with.
4. Their fraud technology may not be the greatest. Fraud and identity theft is more and more common these days. If someone hacks into your banking profile, some banks are better equipped to identify the theft and stop it before it becomes too problematic. The lenders that invest in that technology usually don’t have the lowest rate.
5. They can have a very slow turnaround time. While the low interest rate may be very appealing, it literally means nothing if you can’t meet settlement deadlines, or it takes months to refinance.
6. You may not be able to have an offset account OR the bank won’t offer multiple offset accounts. This multiple offset feature is very underrated. The ability to split your banking and manage your finances with separate accounts can save you thousands over the years, more than you’d save on the lower interest rate.
7. They may have a credit policy that is more limited and more restrictive. You may be borrowing less than you otherwise could have due to their risk-averse credit policies. Borrowing less can mean a lesser-value property that perhaps only suits you for a couple of years instead of the next ten. And then what happens if you require a higher loan-to-value ratio loan? Their restrictive lending policies may not allow this. Buying a less-than-ideal property and having to sell before you have recouped your costs will cost you far more than buying the right property that suits you for more years or one that can be improved.
8. It can be problematic if you’re buying a “unique” property, something that may be more rural or regional, or you need a construction loan, or indeed if you are a bit unique yourself. Often to get approved for a lower loan with one of these lenders, you’ll need to be a “vanilla” customer (so not self-employed or on a contract or part-time) with a PAYG job and buying a standard residential property.
9. They may have an inferior approval process. This can include not allowing upfront valuations, whereby the application may be approved subject to valuation, and then after a long assessment process, find out the valuation is less than the purchase price, or there is insufficient equity to refinance. Or they require so many levels of approval with a wait time in between each step adding time and frustration to the process.
10. That lender and that rate may suit you now, but may not be able to grow with you. Will they let you extract equity from your property with any type of structure? Beware of low-cost online providers that will not let you have an equity extraction loan against your home or require a contract of sale to use the equity. This can be problematic if you need these funds to pay a deposit and act quickly when you find that new property.