Understanding the real cost of your home loan

When it comes to home loans, many borrowers will discover over time that you don’t always get what it says on the box.

Or if you do, it was probably written on the packaging in fine print that you missed, either in the excitement of purchasing a property or from being overwhelmed by the cost and stress of making it all happen.

That’s why many Australians seek guidance from a qualified mortgage broker. Mortgage brokers assess their client’s circumstances and goals and then go into the market to find the best deal possible. And, perhaps most importantly, when the cost of living is ever higher, they can save you money – both now and down the track by calculating and communicating the real cost of your home loan.

In recent months, a huge number of Australians have been confronted by a phenomenon dubbed ‘the mortgage cliff’. They’re borrowers who locked in ultra-low interest rates of about two per cent back before the Reserve Bank began lifting the cash rate.

When those terms expired, they rolled off automatically onto their bank’s standard rate – which is probably about 6.5 per cent these days. That’s a mammoth hit to take all at once. Many probably assume that this situation is inescapable. After all, they fixed it knowing they would revert to a variable rate at some point… right?

But in truth, the rate they’re then getting isn’t the lowest one in the market. It’s probably not even the lowest possible variable rate at that bank.

Lending is a very competitive environment – especially at the moment – so lenders pull out all the stops to lure in new customers. As a result, a borrower might be able to snare a good deal by refinancing.

For that borrower coming off a fixed rate onto something like 6.5 per cent, they could refinance with a lender and receive an introductory rate for new customers from about 5.7 per cent.

That’s a big difference. It pays to know what deals are in the market and what you might be eligible for. A qualified mortgage broker can help you assess your options.

When you hear the phrase ‘per annum’, you’d rightly assume you’re talking about yearly. But in the world of mortgages, we’re not – that per cent per annum you’re paying in interest is calculated daily.

It’s a quirk of lending that is referred to as the “simple method” – that is, dividing an interest rate by the 365 days of the year. Basically, they take the daily rate of your outstanding home loan and then charge it to you monthly.

With that in mind and compounding factored in, it means you’re paying more than the annual rate advertised by your bank.

At the end of a year, it might not be much. It could be about $ 1,000, depending on the size of the loan. But over the entire length of the mortgage, that all adds up – and it goes straight into your lender’s coffers, not onto the balance of your loan.

It’s a great reason why offset accounts are so powerful in helping reduce that interest cost by having your accumulated savings “offsetting” against your home loan, thereby saving the daily interest cost by the equivalent of your savings.

Bank fees are an accepted part of life. You receive a service and pay a nominal cost in return. It seems straightforward. But home loans can come with a raft of fees – some of which are plain, others that a borrower might not appreciate until later.

There’s usually an application fee. It’s the cost you pay when you go to a lender and ask for a loan. How much you might have to pay depends on the lender. For some, it could be $400. For others, it could be almost double that.

There will often be fees for variations made to a loan agreement. For example, if you switch from paying principal and interest to interest-only, or vice versa, there might be a charge incurred.

For those who take out a fixed rate mortgage, there will be costs associated with ending the arrangement early. Say you sell and want to pay off and terminate the loan. You’ll have to pay. It can be quite a large sum, too.

Most products have ongoing fees payable to the lender for managing your loan. It might seem small in isolation – maybe $10 a month or so – but again, that adds up over the course of a year and the life of a loan. When the loan comes to an end, there will usually be a discharge fee, too. That’s right – a cost for the mortgage period being over, either because you’ve sold and paid back what you owe or even when you have paid it off in full over 30 years. It could be as much as $500.

There are often opportunities to avoid paying some of these fees or getting a one-off or ongoing discount. It pays to work with a qualified broker to sniff out not just the best interest rate possible but the best loan product in terms of fees.

There could be reduced fees on offer, a starting bonus, or even an arrangement made where a fee takes care of a suite of banking products with the same lender.

Another thing a good mortgage broker can do is help you understand opportunities that might seem good on paper but actually come with some potentially costly catches.

The pressure of rising interest rates on household budgets has seen some lenders offer super long-term mortgages in recent months.

There’s Ubank with a 35-year product, and Australian Mutual with a loan life of 40 years, to name just a few in the market, which can slash hundreds off the cost of a borrower’s monthly repayments. That reprieve is nothing to be sniffed at in this cost-of-living climate.

But beware, as the true cost of a short-term saving over the life of that mortgage term is significant – about $100,000 more in interest on a standard loan size. Some borrowers might not fully appreciate the reality of the situation and, in the long run, end up paying significantly more and being in a worse financial position than initially thought.

If you want to learn more about how a mortgage broker can help you with your financial goals, book a complimentary meeting with one of our experienced brokers.

Finding a great broker requires a little effort on your part, but it will pay handsome dividends in terms of finance success. If you’re looking to secure funds for your next purchase, why not reach out to our team at Intuitive Finance for a chat.