Hear every other week from clients and to be clients…
My friend is paying 3.xx interest rate, so why am I on 3.yy ?
There are so many factors that influence lender pricing
So before you compare what your friends are paying (or think you SHOULD be paying), consider these:
1. Is your property your home or investment?
> Investments are priced harsher compared to owner occupied properties (thanks to the APRA regulations in 2014/2015! Lenders found a way to charge more!)
2. Are you paying Principal & Interest (P&I) or Interest Only (IO)
> Interest Only properties are priced harsher compared to owner occupied properties (thanks to the APRA regulations in 2014/2015! Lenders found a way to charge more!)
3. If it’s an existing property with a lender, did you pay Lenders Mortgage Insurance (LMI) or not?
> Lenders know when you have paid LMI, you don’t have too many options (until the property has grown significantly)
4. If it’s a new purchase you’re doing, the lenders think of these factors> Are you / your partner in probation or changing jobs?
> Are you / your partner in a new casual job
> Do you run a business or on an ABN – what have the last 2 years of income been?
> Are you living at home? Or are you renting?
> What interest rates are you paying on your current properties? (various lenders have various floor rates and what you are assessed with one lender may differ from another lender)
5. Are you going to a bank lender or non bank lender?
> When you have exhausted your borrowing capacity with bank lenders (provided you started selecting lenders in the right order and structures in the first place)… non bank lenders is where you would go to
> When you go lenders of last resort – of course they would charge a higher interest rate (do you want the money or not? of course they will charge other fees and charges such as for valuations, application fee etc
6. If you’re buying a home – will you be investing in the future (may not matter today, but this will influence your financial trajectory in 2, 3, 5 years)
> Some banks are more friendly than others to equity releases (especially if you are paying LMI)
> Some banks have more flexible post settlement processes (so you can pay off your home loan faster and ensure your future savings are converted to tax deductible funds – consider debt recycling strategy)
7. The rate you receive (with the lender you fit in considering points 4 in particular above), will depend on the lender appetite around discounts they are giving this week. This may be entirely different next week. And this is also dependent on:
> Loan to value ratio (LVR) (are you doing an 80% LVR, 88% or 90% LVR?
> Your loan amount – $350k loan will clearly have a lower rate than a $1million loan
> How much existing lending do you have with the lender? Economies of scale can drive discounts you receive, unless the lender does the same rate for all clients based on the LVR
8. Are you going for a basic loan or a packaged loan? Yes basic might get you a great rate on the surface, however, what is the cost to you mid to long term?
Tip: Make sure you think through the decision making process, before you commit to a lender and not just throw a dart at the board. Unless of course, you don’t care about your financial future and are okay to pay the price later
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