Why a low interest rate shouldn’t be a deciding factor.
It’s great to save money on a cheaper rate loan. But, sometimes choosing a low interest rate can cost you more in other ways.
In fact, there are a whole host of other factors to consider before lodging a loan application that could make or break your ability to access equity, refinance or purchase further properties down the track.
Looking beyond the allure of low rates.
Kabir from Zinger finance says that while it is important to secure a competitive rate loan, there are many other things borrowers should consider.
“Low interest rates can be a factor – but, not the only one.”
He says borrowers should look at how the lender values properties, as well as its policies on what it does and doesn’t accept before making a decision.
Instead of saving $150 per month on interest repayments with a cheaper rate loan, he says it may be possible to fund a subsequent property purchase by going with a lender who values your property higher.
First and foremost, look at your plan.
Kabir says it is important to assess your specific needs and goals before deciding which lender to go with.
“It all boils down to the client’s plan.”
He says low interest rates should definitely not be a deciding factor for those looking to build an investment portfolio.
How does the lender value properties?
Often, lenders will run special promotions where they offer a discounted rate – but there can be hidden opportunity costs involved. Under these promotions, lenders will often lower their valuations on properties. This means that an investor looking to build their portfolio may not be able to access as much equity as they could have done with a different lender.
And while some banks will give really good valuations, they may not be that great at offering competitive rates. It’s a give and take thing.
How much can you save by choosing a low interest rate?
According to Kabir, banks are currently competing on a more even platform than they used to. The difference in rates can’t be too high from lender to lender, and generally doesn’t exceed 0.5%.
Banks have different policies.
It is detrimental to make sure you lodge your loan application with a lender whose policies fit in with your situation and goals.
Kabir says borrowers should speak with a broker or to the bank they are looking to use in order to confirm all of their details regarding employment, income and what they are looking for.
“Get a confirmation first as to whether it fits into the bank’s policies before lodging a pre-approval or a loan application.”
This is important because every loan application you make is included in your credit report – which is the first thing lenders look at when assessing if you are a desirable customer.
The more enquiries you make, the lower your score will drop. If you keep going from bank to bank and getting knocked back due to their criteria, you may then miss out on a bank that would have lent to you based on their criteria, because of your credit score.
Other employment types.
Those who are self-employed or employed on a contract basis may want to go with a lender who has the lowest rate. But, this lender may have stricter requirements when it comes to assessing serviceability. They may require a full year’s financials when you may only be four months into a contract. Whereas, other lenders may not require this, but their rates could be a bit higher.
What should people look for when choosing a loan?
Whether you are an investor or a home buyer, it is important to understand what features you need in a loan before making a decision.
Then, it is a matter of finding the right lender whose policies support your situation as well as the right loan that can help you achieve your financial loans.
What should investors look at when choosing a loan?
Kabir says investors who want to build a property portfolio should look at the following things first and foremost before considering interest rates.
1) How do different lenders value properties?
You can find this out by speaking with a broker. At Zinger finance, we have the ability to order an upfront valuation without charging our clients for it.
We can then compare them to figure out which lender will give the best valuation before deciding which bank to lodge the application with.
This is important because it can affect the borrower’s ability to fund their next property purchase as they build an investment portfolio.
2) Which lenders will give the maximum amount of equity?
Some lenders put a cap on the amount of equity they will let you pull out, so even if they have valued the property favourably, you may only have access to a small amount of it.
Others require strict documentation in order to release equity, such as a contract of sale. Whereas others only require you to state the purpose of release.
3) To fix or not to fix?
If you decide to fix rates for a set term but then decide to refinance in order to pull out equity before the end of the term, you will have to pay exit fees.
It is important to make a sound decision before fixing rates to avoid paying break costs.
But, if you are unsure whether you will want to pull out equity yet you want some stability in your loan repayments, you may be able to enter into a split loan, in which a portion is fixed and the rest is not.
In this case, if you want to release equity, you will have to do it with the same financial institution, so it is important to look at how well they value properties before deciding.
What should first home buyers look for in a loan?
While first homebuyers would benefit from getting the best rate available, it is still important to weigh up all the options before making a decision.
If you want to release equity from your home in order to buy an investment property, then you should consider the same factors that a portfolio building investor would.
If, however, you want to buy a home and you are sure you won’t be tapping into its equity, then you should try to find the lowest rate available. However, you need to make sure that the bank’s policies fit in with your needs.