Owner Occupied Home Loan with OFFSET Account & Variable Interest Rate

• 

  naritas on 03/01/2017 - 22:57

  +3

  A few suggestions:
  1. The Australian Government guarantee definitely does apply to the 100% offset accounts of ADIs as they are a transaction account like any other transaction account merely with a different rate of interest applied.
  2. You've left off some critical fees such exit costs, redraw fees and operational charges for any attached transaction account or credit cards (transaction accounts are a feature of 100% offset/package loans). You'd probably also do well to consider comparing the actual functionality being provided at each price point - offset accounts from non-ADIs do not usually operate as seamlessly as those offered by ADIs. Furthermore, many loan products with no annual fee do not provide a 100% offset account or included credit card (such features may or may not be important to you).
  3. The rate reflected today is nearly certain not to be indicative of the relative market position of the lender 3 months from now vis a vis these are all variable rate products, expect a huge number of changes to product pricing in February to roughly coincide with the first RBA announcement of this year. A number of the biggest lenders have moved first - changes are permeating across the industry daily.
  4. Ratings and awards from Canstar, Mozo, Money Magazine, etc are not a solid yard stick of a lender's reliability in isolation. You asking in this forum is probably good indication of the fact that you appreciate this. Dig deeper into review sites, forum posts, speak to people who bank with them and also people like brokers who refer these lenders work for opinions.

  Hope this helps.

  • 

    squeeb on 04/01/2017 - 00:22

    +1

    Some good points, Naritas.
    1. Edited that comment as the Government guarantee does not apply to non-bank lenders. Not a moot point for me personally but it seems to come up.
    2. I have some incomplete notes on the discharge fees. None so far are overly excessively as the legislation has changed on that. Haven't seen any redraw fees worth noting so far. Certainly the internet banking websites are very basic but most offer BPay and EFT.
    3. Totally agree. The interest price fluctuations change with the wholesale lending rates on offer. Investment property interest rate rises seem to be targeted more than owner occupier at the moment. I noticed AMP are lifting there rates on 6 January and Virgin (for investment loans) on 9 January. There is never any guarantee that a lender who has been very competitive in the market in the past will remain to do so in the future but that is always the gamble. A history of a lender offering competitive market interest rates in the past gives a little bit of comfort though.
    4. I expect that there are a lot of other reasons why certain lenders get numerous awards. Those organisations that are rating and awarding lenders are also running commercial businesses…. take their advice with a dose of skepticism. Just because a lender is small or doesn't have a familiar brand name, it doesn't necessary follow that their product offering is not competitive. Just putting thoughts out there for people to consider and discuss the pros and cons.

    • 

      naritas on 04/01/2017 - 06:43

      +2

      Some further feedback below

      1. I have some incomplete notes on the discharge fees. None so far are overly excessively as the legislation has changed on that. Haven't seen any redraw fees worth noting so far. Certainly the internet banking websites are very basic but most offer BPay and EFT.

      The change in legislation to ban deferred establishment fees (DEFs) has done little to stop the majority of exit fees from being charged (vis a vis it was rare for the majority of people to pay big DEFs, most paid fees under $1500). What used to be labelled as a DEF is now simply labelled as reasonable administrative cost and is still charged. These fees range from $250-1000 (on average). Some of the lenders you have listed have traditionally sat at the high side of that spectrum.

      Haven't seen any redraw fees worth noting so far.

      It is a common ploy of lenders who offer no annual fees to charge ~$25 for redraws. Depending on how a borrower is intending to use their loan account this cost can add up rather quickly - so it is worth double checking upfront if you intend to use redraw frequently. Similarly, if you were wanting a bundled credit card, it is common for discount products to require the borrower to pay an extra fee for 'premium' cards or rewards programs (as in, basic cards are bundled for 'free' and anything above above basic such as Qantas rewards, additional card holders, 55 day interest free periods with rewards points, etc comes at an extra cost).

      A history of a lender offering competitive market interest rates in the past gives a little bit of comfort though.

      As a general observation from the past 15 years of monitoring lenders, most (if not all) lenders over time aim to increase margins on existing customers. As such, if one is aiming to get ultimate price efficiency you need to plan to review your finance structure every 2-3 years. Which comes back to the importance of exit costs (as well as establishment fees). Some discount lenders base a significant focus on their revenue generation strategy around the fact that rate sensitive borrowers will want to exit in 12 months or so because they are dissatisfied with rate changes that have eroded their market leading position or are dissatisfied with the loan functionality/service.

      1. I expect that there are a lot of other reasons why certain lenders get numerous awards. Those organisations that are rating and awarding lenders are also running commercial businesses…. take their advice with a dose of skepticism. Just because a lender is small or doesn't have a familiar brand name, it doesn't necessary follow that their product offering is not competitive. Just putting thoughts out there for people to consider and discuss the pros and cons.

      Agreed. Probably the critical thing for a borrower to understand is that there is no such thing as a free lunch in the finance world. This means you need to have your own list of what's important to you. For example do you want:
      1. To deal with highly trained local staff with excellent communication skills & tight SLAs vs. poorly trained foreign call center casuals & a much less reliable/speedy approval experience?
      2. The latest in technology vs. lesser quality interfaces?
      3. To deal with a billion dollar global company vs. a micro corporation?
      4. A commonwealth guarantee on your offset funds?
      5. To deal with a company that has a strong social responsibility or community ethos vs. one that doesn't?

      All of these these factors (and many more) influence the delivery rate (for banks and non-banks alike). In short, the more things you are willing to trade off, the cheaper the rate you may end up paying (ceteris paribus).

      Hope this helps.

      • 

        squeeb on 04/01/2017 - 09:50

        Yes. Very helpful, Naritas.

        I will add exit costs to the table above.

        ..if one is aiming to get ultimate price efficiency you need to plan to review your finance structure every 2-3 years.

        Very sound advice. I have calculated the total cost of loans that I am interested in over a 30 year horizon so that I can compare apples with apples. I now plan to do the same exercise over a 2 and 3 year period. You are very right, the reality of staying with the same lender these days for the life of the loan is very slim. Existing mortgage holders are nearly forced to change lenders or be stuck with noncompetitive interest rates that have risen over time.

        Problems such as staff with bad customer service and poor communication skills, slow and frustrating approval processes and basic interfaces occur across the board. They are certainly not directly proportional to the fees, charges and interest rate. They are subjective so I personally rate them very low down the list.

• 

  naritas on 04/01/2017 - 12:20

  +1

  I will add exit costs to the table above.

  Definitely worth doing. Also, it would be worth noting whether valuation or application fees are charged if you don't settle a loan with the lender. The timing of those costs are important because you may still be up for costs if your application is rejected or you elect not to proceed mid-process for whatever reason. NB: This is a common tactic used in low headline rate lending.

  Problems such as staff with bad customer service and poor communication skills, slow and frustrating approval processes and basic interfaces occur across the board. They are certainly not directly proportional to the fees, charges and interest rate.

  In our experience, there is an unfortunate and persistent correlation (albeit not a perfect correlation) between comparatively low rates and some or all of these problems. In the vast majority of cases, the cheapest lender(s) on our panel are often the slowest and most picky when it comes to processing applications. Fact is, comparatively low rates will nearly always see three phenomena occur:
  1. The lender becomes busy because news travels fast. This leads to the lender becoming literally swamped with applications.
  2. Because the lender needs to return monies to its investors, the margins will be tight on low interest rate mortgages. This means that staff numbers/quality and processing resources will be kept to a minimum to maintain margin - this often leads to blowouts in processing times/mistakes. Using a real world example that our team has seen, think 2-3 months for a refinance instead of 2 weeks.
  3. As a result of the lender experiencing high volumes of applications that need to be processed with maximum efficiency they will be very picky when it comes to finance approvals. This most commonly means that the credit criteria for ultra cheap loans is very narrow (i.e. people who might otherwise get approved are rejected/given a very difficult road to approval) OR worse still, the lender won't be ultra picky - they actually expect bad loans to get approved - and ultimately the only reason they offered the low price was to bait people into a variable loan which they intended to rapidly increase margin on (to offset the cost of having bad borrowers on their books).

  NB: What's listed above is by no means a definitive set of rules vis a vis we're not saying it is impossible for a borrower to outsmart the financial system/all lenders. The reality, however, is that one needs be rational with respect expectations when it comes to the ability to outsmart money lenders.

  • 

    squeeb on 04/01/2017 - 13:09

    Yes. There are lot's of traps. I doubt that borrowers can outsmart the system as lenders will always protect themselves with the terms and conditions. Can only hope to make well informed financial decisions by asking lot's of questions and learning from others.