Why home loans are no longer created equal
Here's an interesting exercise. Next time you're talking to a bank, ask them what their standard variable rate on home loans is.
It's a simple question but it can't be answered without them asking you a couple of questions too.
"Is it for a home or an investment?" "Will you be paying interest-only or principal and interest?" "Are you a new customer?" "Would you be interested in a packaged loan?" And so on.
There's no such thing as a standard variable rate anymore, which makes it very hard for borrowers to compare loans.
Take NAB, for example. This month the bank will divide its home loan products into four categories: owner-occupier, investor, interest-only and principal and interest.
At the time of writing, NAB had a two-tier price structure - one rate for interest-only and one for principal and interest; the difference is 0.29%.
This month it could potentially have four "standard" variable interest rates, which of course could make it very exciting for its bottom line.
Putting profits aside, NAB says these changes "are a continuation of our ongoing focus to manage the pace of investor growth and concerns about the prevalence of interest-only lending in the Australian housing market".
Yes, there are reasons to be concerned.
As the bank highlights, over the past three years the total value of housing loans has grown by 27%. During the same period, values of housing investment loans and interest-only loans have grown markedly faster, at 33% and 49% respectively.
While it can make sound financial sense to pay interest-only, especially if there's a serious amount of cash in an offset account, Sally Tindall, money editor of comparison site RateCity, rightly says that "it's important for banks to be engaging in responsible lending practices".
What's happening here is a combination of legislation - APRA's 10% speed limit on investor lending - and risk-based pricing.
And the effect now, unfortunately, is that all home loans are not created equal. If you have a fat deposit, want a big loan, are buying in the right suburb and are a new customer, it could all work out for you. If not, it will pay to compare.
RateCity data shows that owner-occupiers with at least a 20% deposit enjoy rates that are, on average, 0.55% lower than those for other mortgage holders and up to 1% lower for the most competitive loans.
"The lowest rates are saved for people with the biggest deposits," says Tindall.
Mortgage House, for example, has the highest LVR (loan-to-value ratio) requirement in RateCity's database.
If you want access to its rock-bottom 3.89% variable rate, you'll need a deposit of 60%.
But it's not all bad news for investors with small deposits.
As Tindall says: "A number of lenders still offer the same rates to investors and owner-occupiers, some as low as 3.99%, while there are plenty of lenders still willing to offer loans to people with deposits as low as 5%."
How to secure a loan
It you want to a secure a loan, your best bet, says Terry Hunt of Smartline Personal Mortgage Advisers, is to do one or more of the following:
- Keep your LVR less than 88% because once you exceed this, mortgage insurance (which applies if your LVR is greater than 80%) rapidly rises.
- If a family member can help, get them to pledge your loan. The purchase price plus other costs can be borrowed (up to 105% of the purchase price) as long as the LVR across both properties is less than 80%.
- Ask your lender or broker if there are postcode restrictions for where you are about to buy. Your suburb could require a higher deposit.
- Be careful how many loan applications you make as your credit score is affected by the number of credit inquiries.
The right insurance could save your home
After the excitement of buying your home, it's tempting to relax and focus on paying off your mortgage.
But taking time to understand the insurances you need and how to pay your premiums in the face of unexpected hardship could well be key to keeping your biggest asset.
On top of the more obvious insurances for home and contents protection, which are often offered through home loan packages, you can protect your mortgage repayments with income protection, life and trauma insurances.
A good financial planner can help with which products suit you, and which ones may be payable through superannuation, or are tax deductible, making them friendly to your household cash flow.
Important aspects to look for include how quickly insurance payments kick in if you're unable to work or pay the mortgage, and how long the insurance will cover your home loan repayments.