Hidden pitfalls of low interest rate loans

With such interest rate competition in the market these days, it can become quite obscure for borrowers as to whether they have found a genuinely good deal. Here are some things to watch out for.

Honeymoon offers

According to Mortgage Ezy CEO Garry Driscoll, borrowers should read the terms of ‘honeymoon’ offers very carefully.

Honeymoon offers refer to fixed periods during which a loan is at a particularly low interest rate (for example, one to five years). Be careful when looking at honeymoon offers as rates can often jump to a higher-than-market percentage after the honeymoon period is over.

“The most obvious danger is over-commitment if the lender is using the introductory rate as the base rate for serviceability,” Garry says.

“Plenty of times people get excited and say that they are prepared to forgo a lot of the luxuries of life so that they can have a home of their own. But over time, they get tired of missing out on the nicer things in life.”

Therefore, Garry suggests that the biggest thing you can do as a borrower is to make sure you take all lifestyle factors into consideration, as a mortgage is a long-term commitment. Don’t just think about the present, but the future as well.

High establishment and loan servicing fees

When being baited by an appealing interest rate, all may not be what it seems. Tim Brown, the CEO of mortgage aggregator Vow Financial, says that lenders sometimes try to recoup the cost of a low interest rate through exorbitant establishment and loan servicing fees.

“Account-keeping fees, switching fees, application fees and redraw fees are just some of the hidden fees borrowers may find in a loan,” Tim says.

Tim also says these loans are generally fixed for one year. “You may have restrictions such as no extra payments or fixing to a longer term.”

Exit and refinancing fees

A low interest rate loan may also be a little trickier to get out of, if you need to due to a change in circumstances. If you’re thinking about buying a second home or upgrading, this could be a potential issue.

Hefty exit fees and excessive refinancing costs can all end up costing the same as or more than an ordinary interest rate offer. Be sure to read the fine print and know exactly what you are signing up for in these circumstances.

Other considerations

Mortgage Choice head of corporate affairs Jessica Darnbrough says that, when searching for the perfect home loan, rates simply aren’t everything.

“While you want your home-loan interest rate to be competitive, you also need your mortgage to be flexible and cater to your unique needs,” she says.

She suggests considering things like the option of an offset account or redraw facility, the type of rate (fixed, variable or both), the lender, loan term, and whether the loan offers any ‘repayment holiday’ (that is, a break from making repayments for a set period to allow for life’s events like starting a family, changing careers and so on).

Like all home loans on the market, the key is to shop around and read the loan agreement thoroughly. If you’re still unsure about whether a loan is right for you, speak to a mortgage broker or other financial adviser. That way you can rest assured knowing that you found the right deal – even if than means paying a slightly higher interest rate.