What’s the Cheapest Loan?

If I had a dollar for every time……. so the saying goes, and in my case it relates to people asking me what is the best interest rate at the moment or who’s got the cheapest loan?

I wish there was a simple answer to this question, and believe you me, when I first started out in the finance industry I was also naive to think that surely this would be an easy task of simply crunching the numbers and presto, the cheapest loan is Lender A.

Well having personally helped settle over $100 million dollars in residential mortgages in the past 3 years alone, the question of the cheapest loan is one that will not be answerable before the event.

Take a look at the following graph which showcases the Standard Variable rate of the top 9 lenders in the Australian Residential Mortgage Market 

As this chart clearly demonstrates, what was the very best rate on the day you signed up may not be the cheapest over the full or even short term of the loan.  Examples of what I am talking about have appeared very evident during the extraordinary events of past 12 months, when variable interest rates were in freefall.  Lenders like Wizard, Rams, Credit Unions, non – bank lenders, and internet based lenders, who had a strong message in the market about being cheap or competitive, struggled to pass on most of the interest rate reductions, when other lenders did more quickly and also in greater levels.  So those who were sold on this idea of getting the cheapest loan got caught out big time, and the costs for breaking the loan within the first 3 to 4 years put even more strain on their wallets.

History shows us that picking the cheapest loan based on interest rate only, may often result in not getting the cheapest overall loan product.  Why?

1. Because lenders set their own interest rates, as demonstrated by the above graph and every lenders role is to make profits for their shareholders or members.  (That’s right, every lender! Credit Unions and Building Societies then use these profit to offer further services to its members, but they still attempt to make profits)
2. Because life is full of surprises or events that change our own lives resulting in the need for flexibility, as extremely cheap interest style loans, usually have ‘surprises’ such as large break costs or discharge fees to get out of them. They do not offer flexibility in future lending, such as top ups, fee free redraw or re-structure, low mortgage insurance premiums, offset benefits or good customer services.

Borrowers have little control over these ‘unknown variables’, so if a lender decides not to remain competitive or they simply cannot stay competitive, or your life changes and you need to act on your mortgage, you are more than likely going to relinquish any so called savings you might have made based on interest rate alone.

So are we all the resigned to the fact that we might as well just forgo any financial advantages and choose to lend from the bank we bank with now?

NO, NOT AT ALL

We refinance borrowers from uncompetitive and inflexible lenders every week, as we demonstrate to our clients that the overall benefits of refinancing to a new lender, offer both financial (competitive interest rates and reasonable operating fees) as well as offering flexibility and features that are beneficial to that particular borrowers needs for today and tomorrow.  Furthermore, because our loyalty is with the borrower – our client, we also ensure that that lender has a proven track record of being competitive in both the good and bad times.

In closing, the most powerful weapons an experienced and professional finance broking business like Empower Wealth has over the banks and other brokers when assisting our clients is:

1. Passing on the knowledge we have gathered from many years of experience as to which lenders are consistent in their competitive value and flexibility and those who are seasonal and drift in and out offering value
2. Helping our clients separate the ‘wheat from the chaff’ whether new lending or refinancing
3. Advising our clients on finance strategies and structuring that will deliver far bigger benefits over the journey, than just a cheap interest rate
4. Our clients have the peace of mind that we work exclusively for them when sourcing their loans from a selection of proven lenders that offer great products (if they don’t, we don’t recommend them!)
5. Our client’s success and financial wellbeing is a measure of our success.  We don’t sell our clients simply a transactional experience.  Our approach is about forging a long term relationship – ‘Personal Finance Managers for life’, as we aim to provide ongoing solutions consisting of professional support services and knowledge to deliver a competitive result and outcome for our client that will save them both today and accelerate their wealth for tomorrow.

So, if anyone ever tells you (bank staff member or broker) that you have the cheapest home loan in the market, you now know that is an impossible claim to make and it should be clear to you they are trying to ‘sell’ you a mortgage, rather than provide you with a long term solution and plan to move forward with.

Remember Knowledge is empowering……..