With competition always fierce in the mortgage market, lenders are turning their attention to offering sweeteners to attract your business. It is worth considering what such incentives actually mean over the term of your home loan and whether they really look so sweet in the long run.
A recent industry comparison looked at the more prominent incentives currently displaying their wares in the marketplace in the hope of winning your business. Some of the conclusions were startling and painted a clear picture of how it pays to do your sums.
Some lenders offer a cash back payment when you take out your loan or a collection of gift cards and vouchers. These can be very enticing – a thousand dollar shopping spree with a Visa gift card, for example, feels like splashing out on someone else’s tab. Free money, right?
Pause. Think. Put down the car keys.
Incentive deals do not necessarily work out cheaper than choosing a loan with the lowest interest rate.
Even if your lender offered you $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 a month in higher repayments for a $300,000 home loan. That adds up to an extra $600 each year and potentially more than $18,000 over a 30-year loan term for this loan size.
$18,000? That’s a long way from the couple of grand carrot a lender may dangle before an unwary home buyer. It adds insult to injury when you consider how the value of that incentive payment is most likely to be already built into the loan for the lender to recoup the cost of the promotion.
Cash-back incentives, interest rate discounts and fee waivers are the more common sweeteners flooding the home loan market. Many finance products carry excessive fees so it pays to shop around for the right deal with minimal fees. Don’t put too much emphasis on the value of waived fees unless the home loan also ticks the boxes on a competitive interest rate, flexibility and features.
It is a good idea to judge the loan products using the comparison rate rather than the standard variable rate to ensure you are comparing apples with apples. The comparison rate will reflect the true cost of the loan taking into account the interest rate and all fees and charges. This is when the value, or otherwise, of a sweetener will be clear in dollar terms and that will help you make an informed decision about which loan is best for you.