Lenders have specials on all the time to attract home loan clients. Guess what, it works. Most people searching for either a new loan or one to refinance their existing loan are drawn like bees to honey when they see the headline rate.
A few months ago that went as low as 3.79%.
Just as quickly as they appear, these rates disappear as potential borrowers flock in large numbers to the lender offering such a low rate. No problem then. Only, there is. Several, in fact. Here are just a few of them.
Usually these rates are offered as a variable rate (we’ll get to the fixed rates in a minute). They’re designed to fill a shortfall in that lender’s monthly or quarterly growth numbers. Problem is, as soon as those numbers are reached the rate is withdrawn, often with a few days’ notice.
So what’s the problem, I hear you say, everybody wins. Well, not quite. You see, lenders have arrangements in place so that with a normal workload, the processing of a loan shouldn’t take more than a few weeks. Say 3-4 weeks if your refinancing. If you’re buying, add your search time on top of that.
You come to us, your friendly broker, and choose the cheapest rate. We submit your application and your loan is approved. Documentation is sent out for your signatures and the lender increases the rate. Immediately you are on the back foot and you haven’t even signed up yet.
You call your broker and ask how this could be. It shouldn’t be allowed, blah blah blah. The impact this has on a borrower could be as much as two rate rises. It will significantly impact your repayments.
Welcome to mortgage stress before you’ve made a single repayment. At least with a fixed rate special, you’re able to lock in the price (for a fee). We recommend that you do as we can almost guarantee that the special rate will disappear before your loan is processed. As an aside, this fee (to lock in the fixed rate) should really be included in the comparison rate calculation but it isn’t.
Now, mortgage stress is defined as your repayments rising to more than 30% of your gross household income. That would be most residents of Sydney and Melbourne that have purchased a home in the past 3 years. The definition using hard numbers doesn’t do it justice. Rates rising creates mortgage anxiety as it eats into the household budgets that are usually on a knife edge in the first few years of a new loan.
Your broker should be explaining to you how rates work. A good broker will model rate increases for you and show you the impact that it will have on your budget. By law, the broker should be recommending a product that is not unsuitable for you. These budget models are not difficult to create. If your broker can’t do that for you, find one that will. Remember, there are ways – in every budget – to compensate for rate rises. Don’t stress, re-do your budget. If you can’t do it, contact someone who can.