In other articles, we have shown that brokers now process more loans than the Big 4 Banks – about 6 out of 10 borrowers now use a broker and 1 in 4 borrowers who are with a Big 4 Bank are looking to change.
When shopping for a loan, here are 6 common issues borrowers need to consider before seeking a particular loan. Of course, if you use a broker, they will (or should) ensure you have considered all of these issues before you proceed with an application for a loan.
1. Low Advertised Interest Rates
Borrowers are often wooed by the advertising of low interest rates. And understandably, they often shop online to find the lowest deal.
What they don’t realise is that the lowest advertised deal is just the same as a car advertisement – the key word is the word immediately prior to the advertised price ‘from…’
And like a car, the cheapest rate is often the ‘no frills’ rate. It doesn’t have as many features as the premium model and like the cheapest car, when you get behind the wheel, it can feel a little cramped and dare I say it, ‘featureless’.
Plus, you soon discover that not many customers (and certainly not all customers) fall within the small group of customers who fit the profile for this ‘featureless loan’ (unlike a car where the customer chooses which car to buy, with a loan the banks decide who fits which loan – you can want the loan but the bank may not want you!).
If you use a broker, they will work with you to ensure you set realistic expectations of the rate you are likely to be able to negotiate.
2. Credit Cards
We all love our credit card! And, we love a high limit so we can ‘always have enough in reserve for those emergencies.
The problem is the lenders like to look at the limit and not the amount you spend each month – even if you pay it off before incurring any interest charges.
To put this into an example, a credit card with a $20,000 limit which is only used up to $4,000 per month and paid off each month end is assessed by the lender as being the equivalent of $20,000 in debt – not $4,000 and certainly not $Nil.
Good brokers review your limits before you start the loan application process as they know what a particular lender is looking for and whether your credit card limits might impact the amount you can borrow.
3. Credit offered by retailers: aka ‘After Pay Lenders
Every time you obtain credit from a shop, guess what happens: the lender who provides the finance for the retailer has a peek at your credit file. And this peak is noted for all other lenders to see – even if you don’t go ahead with the loan.
And, every time a lender has a peek, it adversely affects your credit score. You can have a perfect credit history in terms of zero defaults but these peaks represent a warning to a potential lender. They suggest you are looking to borrow money ‘here, there and everywhere’. Now, this might not seem fair but it is the world of credit we live in.
Sometimes, your broker will suggest you ‘cool your heels for a while’ and get your credit score up before applying for a loan. Or, they will assist you set a realistic expectation before you start so you don’t get a nasty shock later on.
4. Honeymoon or introductory home loan rates
Quite naturally, borrowers are attracted by the interest rate quoted for the first year of a contract.
These facilities normally revert to the “standard variable rate” after the first year. The issue is, is this standard variable rate equal to or worse than the rate you can negotiate up front?
Chances are, once a lender has got you in with their honeymoon rate, the rate you revert to after the honeymoon period is going to be higher than the rate you can negotiate up front – particularly if you are using a broker as brokers know ‘how low you can go’.
5. Fees and Charges
Most, but not all loans will probably have a range of non-negotiable establishment fees for the application process, the lender’s legal costs and the valuation fees.
A broker will be aware of these costs for each lender and will factor them into your funding needs.
Also, there may be exit fees, particularly for fixed rate loans if you want to exit the fixed rate portion before the term for the fixed portion has expired.
Your broker should ensure you have considered this issue and made sure you have considered what is best for you in terms of the mix of variable and fixed loan amounts.
6. Fixed Rates
These days, many borrowers consider putting a portion of their loan in a fixed rate loan so they get some certainty as to the repayments. Whilst this is a good idea to consider this option, it is not without its own risks and issues.
Apart from exit fees for an early exit of a fixed rate loan, fixed rate loans can be more restrictive in terms of some loan features such as interest offset accounts, extra repayments and redraw facilities.
Your broker can explain to you what restrictions will apply to your fixed rate loan with a particular lender before you dive in to ‘lock in a good rate’.