As mortgage rates fall lenders are loading repayments with extra charges.
The banks are pushing loan packages with discounts on the interest rate, home insurance premiums and credit card fees, but they come with an annual fee between $395 and $750.
For example, banks will waive the annual and second cardholder fee on credit cards but not the penalty interest rate.
Nor are the extra inducements cheaper than shopping around for the best deal.
Credit card issuers such as Citibank are also charging a handling fee of 3 per cent on balance transfers to their introductory zero rate credit cards.
Bigger imposts are reserved for first home buyers and investors with a deposit under 20 per cent of the property’s value paying lender’s mortgage insurance.
Even re-financing to a cheaper loan incurs a slug of about $500, despite the abolition of exit fees. This includes an administrative fee from the lender you’re leaving and a state levy.
Discounts within the bank package deals may not be cheaper than you could find separately, according to Smartline adviser Karen Forbes.
“You might get a cheaper home insurance quote yourself. Or the bank branch might not tell you there’s also a no fee loan available,” she warns.
Independent research group Canstar agrees.
“You can probably do better by shopping around for the individual components. The big saver is the discount on the loan rate. Other bells and whistles are nice, but an 0.8 per cent discount is the big ticket item,” says research manager Mitchell Watson.
He estimates the threshold where a package deal beats a more basic loan is a mortgage of about $200,000.
“There’s also the convenience of only having to deal with one institution,” he says.
Another trap is lender’s insurance, which can cost thousands and has nothing to do with protection against illness or losing a job.
In fact it protects the lender from you, if you default and your repossessed home sells for less than what you owe.
Lender’s insurance is a one-off premium that can cost thousands of dollars and is either front-loaded on to the home loan – exacerbating the insufficient valuation ratio which caused the problem in the first place – or is capitalised and so accrues interest.
Some lenders will also add up to 0.5 per cent to the mortgage rate.
Borrowers with a loan exceeding 80 per cent of a property’s value who re-finance for a lower rate, can also be caught out by the fact that lender’s insurance can’t be transferred; you need to take out a new policy and so pay another premium.
Premiums can vary enormously between banks and other lenders, and can quickly wipe out any gains from a seemingly cheaper loan.
“An extra $4000 in lender’s mortgage insurance premiums requires an exceptionally good rate to balance out the cost,” Forbes says.
Lenders use different scales of loan amounts to set the premiums.
“Some lenders’ scales go up in one or two percentage increments. One of the major banks adds a loading for self-employed people, and most lenders have a loading for investment properties.
“This information isn’t published on lenders’ websites, so you don’t know the premium until you’re well and truly advanced in the home loan application process,” she warns.
Parents or grandparents giving or lending “a few thousand” to first home buyers can save $10,000 in mortgage insurance, says Tony Harris, director of themoneystore.com.au.
Most lenders offer insurance for borrowers as well but few take it up, even though it is protection against a disability preventing work or involuntary unemployment.
ANZ’s website shows borrower’s insurance on a $200,000 home loan with monthly repayments of $1300 costs $37.31 a month.
Only one-quarter of borrowers recently surveyed by mortgage insurer QBE had mortgage repayment protection insurance.
This dropped to just one in five “for those who have struggled with repayments in the past 12 months,” says Jenny Boddington, chief executive of QBE LMI. Securing a better deal
What you’re told by a bank’s mobile lender may not be its best offer, as Danielle and Glenn Waterson discovered.
That’s despite their hands being tied because they had to pay $6000 in lender’s mortgage insurance, which they’d be up for all over again if they switched lenders.
They were on a NAB package rate but when it came to buying their second property, and keeping the first as an investment, the bank’s mobile lender offered 4.82 per cent but with no new fees for the second loan.
Luckily for the couple they were frustrated by his follow-up, or rather lack if it. So they contacted mortgage broker Chris Howitt of Mortgage Choice, who had been recommended by a friend of Danielles.
In fact they’ve never met him – “we’re both at work so it all had to be by email and phone but for me that’s perfect,” says Glenn – which didn’t stop Howitt squeezing a better offer from the bank.
“We tried CBA but the rate wasn’t as good and we would have had to pay $6000 mortgage insurance again. NAB was our only option but Chris said he was confident he could get a better rate. It was all so simple and effortless,” Glenn says.
They finished up with 4.77 per cent, no extra lender’s insurance and even a $375 cash refund thrown in.