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The battle of the Banks

Lenders have declared war in the home-loan market but for every discount thrown in your direction, beware a fee ambush.

The big banks are gunning for your home-loan business – waiving fees, boosting interest discounts on “package” loans, promising lower rates for loyalty and even paying for you to leave your existing lender.

Borrowers should certainly make the most of it but mortgage market analysts warn they should also be careful not to let the special deals blow smoke over the true cost of a loan.

The dynamite 0.8 percentage point markdown offered by a big bank could be very worthwhile – or it may only bring the rate into line with those already available elsewhere. You might do even better if you look around.

The impact of ongoing costs, such as monthly fees, over 20 years or more is far greater than a lender’s seemingly generous offer to waive your one-off $350 application fee or to pay your exit fee.

The latest battle in the mortgage wars began late last year when National Australia Bank took a potshot at its rivals by banishing exit fees – something all lenders have to do from July 1 anyway.

NAB escalated hostilities this month when it offered to meet up to $700 in exit fees for people who switch from the Commonwealth Bank and Westpac – the two lenders ahead of it in the home-loan business.

Westpac lobbed a grenade back by dropping its application fee and offering a discount of up to 0.8 percentage points on some home loans.

Meanwhile, a number of lenders laid landmines by introducing “loyalty” discounts – cutting your interest rate if you stay for a few years – a practice expected to become more common once exit fees go, as of July 1.

Then on February 20, NAB-owned UBank announced a variable home loan priced at 7.05 per cent, with no application fee, no ongoing administration fees, no exit fee and a 0.10 percentage point loyalty discount for the life of the loan, once you’ve held it for three years.

Five days later, the Commonwealth Bank announced a “no-fee” variable interest rate home loan, with what it described as a highly competitive interest rate of 7.24 per cent.

The loan will have no annual fees, no monthly fees and no exit fees.

“Unlike our competitors, we won’t apply fees such as late-payment fees, loan service fees, settlement fees or loan increase fees,” says the group executive of retail banking services for the CBA, Ross McEwan.

Only mandatory government charges and, if applicable, mortgage insurance will be levied.

There is a minimum loan amount of $150,000, however, and some smaller lenders have rates closer to 7 per cent.

Attractive as some of these deals sound, the chief executive of interest rate researcher RateCity, Damian Smith, says you should still do the maths on the total cost of a loan and continue to shop around.

“Cheer on competition, by all means, but start from the assumption that the banks will always make [a special deal] up in some other way,” Smith says.

Let’s look at some of the specials on offer and how they stack up.

NO EXIT

Exit fees have taken on “totemic” status in recent times, Smith says, “but the interest rate itself matters a heck of a lot more”.

“Even a really small difference in interest rate makes the biggest single difference – that’s the thing that happens every month for the life of the loan,” he says.

That and monthly service fees.

As a proportion of the cost of most loans, the exit fee is reasonably small, he says. Stay a few years and you won’t pay it at all.

WAIVERS

Some lenders are offering to waive establishment fees to attract customers.

However, RateCity advises to check the comparison interest rates on the 22 per cent of home loans in its database that don’t come with establishment fees anyway.

And while you might save on the one-off establishment fee, RateCity reports that the ongoing annual fee for a big four bank averages $248 (not including the CBA’s new no-fee loan), more than three times the average of $76 for other lenders.

And there are lenders out there that don’t charge monthly fees at all, saving you big money over the life of a loan.

PACKAGED PRODUCTS

Bundle a mortgage, transaction account and credit card together in a package loan and you’ll get as much as 0.8 percentage points shaved off the bank’s standard variable rate.

You’ll also save on monthly account-keeping fees and qualify for discounts on services such as insurance.

However, you’ll pay an annual fee of about $350 for the privileges.

The rate discount can certainly be worthwhile, says an analyst for Canstar Cannex, Mitchell Watson.

At the most common discount of 0.7 percentage points, you’ll save $135 a month on the repayments of a $300,000 loan – or more than $40,000 over the life of the debt.

But bear in mind the discount may be from what is a high rate to start with. When RateCity checked for Money, the lowest-rate package home loan was still 0.2 percentage points more expensive than the cheapest non-package home loan.

Plus, the credit card is likely to be a premium card charging 20 per cent interest a year – painful if you don’t clear your balance each month.

In Britain, the Financial Services Authority is investigating concerns package home-loan perks – in particular the insurance – have “questionable” benefits. Consumers have complained that the tied insurance is expensive and it can be hard to make claims.

REWARDS FOR LOYALTY

RateCity says eight home loans now come with loyalty discounts, compared with only one a year ago. With these loans the longer you stay, the greater the discount.

The HSBC Home Rewards loan, for instance, gives a 0.25 percentage point discount at the end of the first year and a 0.5 percentage point discount at the end of the second year, while the BankWest Rate Cutter provides a 0.1 percentage point discount at the end of each of the first four years.

The trouble is, loyalty loans can still be more expensive than other loans on the market, RateCity says. In one comparison, a $300,000 loyalty loan would have cost $10,000 more over a 25-year term than the cheapest standard home loan available at the time.

“You need to look past these discounts and really look at the big picture – ‘Does that discount really provide me with a benefit against what else is available in the market?”‘ Watson says.

“Look at the comparison rate to take into account all the different costs of the loan.”

Key points

– Saving $350 on an establishment or exit fee is a drop in the ocean on a large loan.

– The cost of ongoing fees is much more important than the saving on a one-off fee.

– A package loan discount can be worthwhile, but it’s often off what is a high rate anyway.

– Loyalty loan discounts may also be off a high starting rate.


Posted by Lesley Parker – The Sydney Mor on 2nd March, 2011