The hidden costs of home loans

Sweetener: A substance to sweeten food or drink. In the finance world, it typically comes in the form of money or a concession. With home loans it can mean anything from interest rate discounts or frequent flyer points to cash backs or even winning back your mortgage repayments.

But as mortgage brokers warn, what tastes like sugar may not always be a sweet deal. Joe Sirianni, executive director of Smartline Personal Mortgage Advisers, tells his clients to be wary of enticements. "They are of minimal financial benefit and the cost of them may already be built into the cost of your home loan product," he says.

Michelle Hutchison, from comparison website finder.com.au, agrees, saying that in general these deals are not necessarily the cheapest overall. "Variable rate home loans start from 4.49% with loans.com.au," she says.

"Even if you received $2000 cash back up front, it won't outweigh the cost of the loan if the interest rate is even a little higher. Every 0.25% is worth about $50 every month in higher repayments for a $300,000 home loan. For just 0.25% more it will cost an extra $600 each year and potentially over $18,000 over a 30-year loan term for this loan size."

According to finder.com.au, cash-back incentives, interest rate discounts and fee waivers are the more common sweeteners flooding the home loan market.

Given fees are generally negotiable with most lenders, home owners shouldn't get too excited by fee waivers unless the home loan stacks up well on both features and price.

Teachers Mutual Bank, ING Direct and Bankwest are just three lenders who are currently waiving their application fees or a year's annual fee, or both. But the real sweetener is that they already offer a competitive product. For example, ING Direct's Orange Advantage home loan - a premium home loan with all the bells and whistles - is priced at just 5.16%.

Even lenders of competitively priced home loans are trying to attract new customers. Take UBank, for example, a Money Best of the Best gold winner for its home loan. If you were one of the first 700 new applicants to refinance with UBank last month, you would have received a rock-bottom rate plus a $2014 EFTPOS gift card.

St.George Bank is currently offering a $1250 rebate for its Advantage Package home loan of $250,000 or more if you apply by March 31 and settle by May 31, 2014. No establishment or monthly fees apply, although you must hold a St.George transaction account and make your repayments by direct debit to receive the rebate.

Again the interest rate is competitive but, if you have to refinance, then some of the cash may be absorbed by the costs involved, especially if a valuation is required.

Mortgage broker David Coates, from Mortgage Choice, expects these kind of deals to continue through the year.

"With interest rates expected to hover around historical lows for a considerable amount of time, lenders are using product sweeteners as a way to attract new business while protecting their profit margins on existing loans."

The deals are not always restricted to new customers. "If you don't ask, you don't get," says Coates. "Existing borrowers can often take advantage of these types of offers from their existing lender. The trick is to ask for it."

While Smartline's Sirianni urges borrowers to focus on the loan's features and structure, there's no denying they can benefit if they do their homework. Let's say you're a Qantas frequent flyer who's looking for a packaged home loan.

Go with one of the major banks and you'll pay around 5.1% on $300,000. Opt to take out the loan with Macquarie Bank, a gold winner in this year's Best of the Best Cheapest Home Loan Package and not only is the interest rate lower than the average of the big four's packaged home loans, but you could earn an easy 150,000 frequent flyer points.

Newcastle Permanent, another Best of the Best award winner, is currently offering its Tier 4 discounted rate of 4.87% - usually reserved for loans over $900,000 - on all home loans.

Police Bank is offering $500 to help with any costs of switching to it, with an additional $180 if you open some standard transaction accounts and a credit card. Refer a friend and you can pick up a further $50. My tip here for existing Police Bank customers is to ask the bank for $500 if it wants you to keep you. As Coates, says the trick is to ask for it!.

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