Puzzle Finance Blog

Loan traps set for borrowers

BORROWERS are being warned not to be lured in by home loan deals offering significant interest rate discounts without understanding the full costs of the loan.

Latest research from comparison website RateCity compared more than 340 home loans and found significant differences in the advertised rate and comparison rate.

RateCity spokeswoman Michelle Hutchinson said first-home buyers were being targeted by marketing campaigns offering low advertised interest rates with these types of loans often ending up being an expensive option.

"They are attracted to these introductory rate home loans because they appear to be the cheaper option to get your foot through the door of the property market,'' she said.

But borrowers need to be really careful because after one year the interest rate reverts to a higher rate and over the next 25 or 30 years you could end up spending a lot more.''

 It also found that even though higher interest rates applied to standard and basic home loans, it ended up being the more cost-effective loan option for borrowers, rather than opting for introductory variable home loan deals.

In other lending news this week, some of the country's biggest financial institutions, including National Australia Bank, have seen a huge increase in the number of customers opting for home loans that come with offset accounts.

NAB spokesman George Svigos says "offset accounts have more than doubled and the balances have almost tripled since 2010''.

Home loans often come with the option of opening a linked transaction (offset) account, allowing workers to deposit their salary into the account and use the funds for everyday banking.

The balance in the transaction account reduces the interest charged on your home loan, is usually calculated daily.

Suncorp's executive manager of personal lending, Tony Meredith, says he has seen a spike in borrowers opting for offset accounts.

"Our offset accounts have increased by 20 per cent year on year,'' he says.

"Families are paying down debt and offset accounts are working in their favour in terms of offsetting interest and reducing debt levels.''

Posted by Sophie Elsworth - News Limited Newspapers on 14th August, 2012 | Comments | Trackbacks

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