Should your home loan interest rate have a '1' in front? Maybe …
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Opinion

Should your home loan interest rate have a '1' in front? Maybe …

The good thing about having confessed my actual home loan interest rate to you all is that I will now spend the next year or so obsessively price checking it, to find out if I made the wrong decision.

Let my neurosis be your mortgage shopping guide!

For someone with a $400,000 mortgage, slicing their interest rate from 2.5 per cent to 2.09 per cent would save them $80 a month.

For someone with a $400,000 mortgage, slicing their interest rate from 2.5 per cent to 2.09 per cent would save them $80 a month.Credit:Jim Rice

If you missed it, I have $400,000 of my home loan fixed for two years at 2.19 per cent interest (now six months in) and the remaining $300,000 fixed for one year (this month) at 2.09 per cent.

So, my weighted average mortgage interest rate is about 2.13 per cent.

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Imagine my horror, then, every time Mark Zuckerberg throws up an ad on my Facebook feed for home loans with a “1” in front.

Are these 1-point-something per cent mortgage rates for real? Or are they too good to be true?

I decided to find out.

Turns out, they are certainly not for everyone. But they definitely are for some people. You just need to know which camp you fall into.

I spoke to two home loan search experts about it this week and both instinctively replied that people should be able to find a mortgage with a “1” in front. Although we later agreed it might be harder than you think.

“Be careful about things like fees,” warned Kate Browne, the managing editor of Finder. Lenders commonly charge an unholy trio of upfront, ongoing and discharge fees. “While the fees might not seem that large, they can add up,” she says.

Unfortunately, comparison interest rates are of little actual help these days.

For example, the Commonwealth Bank’s 1.99 per cent four-year fixed interest home loan has a comparison rate of 3.66 per cent. The other big bank’s fixed offerings have similarly high comparison rates.

What gives?

Turns out, comparison rates are a bit bogus, particularly when it comes to fixed-rate loans. That’s because they automatically assume you revert to the bank’s advertised standard variable rate when your fixed term ends, and stay there for the remainder of a 25-year loan. This “revert rate” hugely skews upwards the result. And only mugs pay the advertised rate with no discount. It’s not realistic.

Another reason comparison rates are a bit spurious is that their calculation method is decades old and assumes a $150,000 loan. If you can buy a home with a $150,000 loan these days, please tell me your secret …

This matters because a $400 annual fee applied to a $150,000 loan represents a much bigger percentage than the same annual fee on a more typical $500,000 loan.

So, beware comparison rates; but don’t ignore them entirely.

Steve Mickenbecker, group executive of financial services at Canstar, says they are still worth eye-balling – just to check for any irregularities with a loan, such as big fees or one-year introductory rates.

“It’s just a little warning bell. If you see a comparison rate that’s well above the actual interest rate, it says have a look at the fees.”

According to Mickenbecker, the Canstar website has 51 loans with a “1” in front – mostly fixed rates but some variable, too.

Unfortunately, these deals are not available to everyone. Many require a maximum Loan to Value (LTV) ratio of 80 per cent. And you generally need to be an owner-occupier paying principal and interest to qualify.

The lowest variable-rate loan – 1.77 per cent from Reduce Home loans – requires you to have a 60 per cent LVR or lower. That isn’t too realistic for new borrowers but, if you have paid down a lot of your loan and have significant equity in your home, it is certainly worth looking at.

If you are considering one of the low fixed-rate loans – which the major banks have gone big on – there are other red flags to consider.

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Many of the “1” per cent fixed loans do not let you have a mortgage offset account – a magical device which lets you use your savings to reduce your loan amount dollar for dollar.

They also can have high break costs if you need to exit the loan. When you’re talking a long period like four years, it’s more likely that you might suffer some change in your life circumstances – a divorce, a job change – that may necessitate exiting the loan.

Also, it’s not inconceivable that interest rates could go lower from here – although let’s hope that the economy picks up enough that doesn’t have to happen.

I asked Browne and Mickenbecker what interest rate should prompt action, if a mortgage holders is still sitting on it.

Browne said anything with a “3” in front requires immediate attention, even if it’s only to call your lender to ask for a rate reduction.

Mickenbecker says anything 2.5 per cent or more and you should be looking for a better deal.

For someone with a $400,000 mortgage, slicing their interest rate from 2.5 per cent to 2.09 per cent would save them $80 a month. And that’s money worth having.

So far, I’m happy with my 2.13 per cent loan with offset feature. But I refuse to set and forget. Because interest rates haven’t fallen that much since I locked in, my break costs from the fixed terms would not be that great – in the region of $1000. So, I’m going to keep shopping for that illusive “1” per cent loan.

I’ll keep you posted.

You can follow Jess’ money adventures on Instagram at @jess_irvine_pics

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