Low rate home loans are attractive on the surface but they may not turn out to be as advantageous as you expect. Find out how you can be a savvy borrower when it comes to finding the right low rate home loan.
How Low Rate Home Loans Work
When you are comparing home loan products, of course you want to find a loan with a low rate. The lower the rate, the less you’ll pay in interest. With a mortgage for several hundred thousand dollars paid over 20 or 30 years, a small difference in the interest rate can translate into tens of thousands of dollars in the overall cost of your loan.
Banks know that borrowers are immediately drawn to the interest rate when comparing loans. In order to attract the business of new customers, they’ll advertise home loans at attractively low rates. While that low rate loan may exist, this type of loan is usually extremely difficult to qualify for.
So, once you start the application process and find out you might not qualify, the lender may encourage you to apply for a different loan product with a higher rate. Then, you end up switching to one of their standard products and getting a higher rate anyway. The ultra-low rate wasn’t really a feasible possibility in the first place.
Low Rate Loan Features
Another problem with low rate home loans is they usually don’t come with many features. These bare-bones basic home loans won’t have elements that could help you pay down your loan faster, like a free offset account or free additional repayments.
If you want a fixed rate loan, don’t expect to get it at the low advertised rate. If the bank gives you the option to fix the loan for a set period, they’ll likely charge a steep fee in order to fix it.
How Can You Qualify for a Low Rate Home Loan?
Just because low rate loans are hard to qualify for doesn’t mean that you can’t get one. For extremely qualified borrowers, a cheap basic variable rate loan may be something that works for your needs.
Here are the restrictions you may run into for low rate loans.
- Modest loan limits. Lenders usually set their maximum borrowing limits much lower than those of a standard loan – often up to $500k – for home loans with cheap interest rates. You’ll also have to borrow above a set minimum. The only way to qualify is if your home loan fits within the lender’s limited parameters.
- Low LVR. You’ll need a sizeable deposit to get that low rate. Lenders generally limit the Loan to Value Ratio (LVR) for low rate home loans to 80% LVR or lower. That means, for a $450k home, you’d need a $90k deposit.
- Excellent credit.You’ll also need to have a clean credit history and a high credit score. If you have submitted late payments on other credit facilities in the past, if you are carrying a lot of personal loan debt, or if your asset position isn’t strong, you might not qualify for the low rate.
If you start the application process and realise you might not qualify or you aren’t going to get the loan features you want, you’ll probably decide to switch to a different loan. This can land you with a higher interest rate, so be sure to thoroughly consider your position before you begin.
Also, when you’re trying to qualify for a mortgage, having your application denied because you applied for a low rate loan with extremely strict criteria isn’t going to make it any easier to qualify for an attractive loan with another lender. Every denied credit application can be a cause for other lenders to view you as an unreliable borrower.
If you’re looking at low rate loans or special discounted rates and you’re worried about qualifying, don’t hesitate to contact us! Our mortgage specialists are familiar with the different deals banks offer, as well as how likely borrowers are to qualify based on everything that goes into your application. Fill out our free online enquiry form today and we can assess your situation. You can also call us on (07) 3146 5732.
Low Rate Loans Can Come with Hidden Costs
Another thing to watch out for when you see that too-good-to-be-true rate is the fees. Sometimes, these low rate loans are the ones with the highest fees, and these fees can add up, making your cheap loan not so cheap after all.
There may be higher one-time fees like loan establishment charges and application fees. The accountant maintenance fees can also be higher, and you’ll also have less flexibility, unless you want to pay for it – redraw fees, exit fees, and switching fees can be really high, limiting what you can do with your loan.
What about Low Introductory Rates – Are They Hard to Qualify For?
Sometimes, instead of a very low rate, you’ll see the lender post a low introductory rate. A low intro late is usually charged for the first year. After those first 12 months, however, the interest rate will go up, increasing your repayments. The loan could also switch to a different loan type.
Unlike low rate home loans, introductory rates aren’t necessarily more difficult to qualify for. Lenders offer these special intro rates to entice new customers. Even though you’ll pay a lower rate for that first year, they know you’ll have to pay a much higher rate for the next 29 years (with a 30 year term) – or at least until you decide to refinance your home loan.
These introductory rates are appealing if you only pay attention to how much you’ll owe each month whilst the the special promotional rate is in effect. Once the ‘honeymoon rate’ is over and your loan switches to the reverted rate, you’ll have to adjust your entire budget to deal with the higher cost. If you weren’t planning ahead, this can be a financial challenge.
Make sure you look over all the details of your mortgage contract and are crystal clear about what will happen to your rate and when. With all variable rate loans, your lender can raise your rate anyway, whether you started with a special introductory rate or not.
Ultimately, the way to get the best rate for you is to shop around. Be sure to compare rates as well as loan features and fees, and to gain professional insight along the way. Our expert team of mortgage brokers can help you get a good deal on your loan. Contact us today to learn more.