Interest rates: Danger in the discount
Have you been to Rebel Sport lately? Did you go during the week when nothing was on sale?
Of course you didn’t because you knew that if you waited you could get what you wanted for 25% less!
What Rebal Sport and other retailers have created is an expectation of sales - to the point where customers will put off their purchases until there's a sale on. This creates a vicious cycle of expectation that the next deal is just around the corner.
We have seen this trend creep into the mortgage industry... Banks are now heavily advertising special rates and offering decent cash contributions regularly to entice customers just like the Rebels and Briscoes of this world.
Many consumers are happily accepting these offers without thinking about what they are actually signing up for.
The margins that the banks have on rates differ from term to term, however, they can set the advertised rates at levels which allow them the ability to discount heavily if challenged. As Mortgage Advisers we have a pretty good handle on where the sweet spots are day to day as they can change regularly.
A common special at the moment is a 12 month fixed rate with a discount of 0.4% with a pretty hefty saving of $400 per year for every $100,000 you have borrowed.
This does sound amazing and can be on the higher end of the discounts available through the range of fixed terms.
Why do they discount this 12 month rate so heavily? Because they want most of their customers to be on the shorter term so that when rates rise, because they will, those terms will expire faster and the customer will be exposed to a higher rate at that stage, increasing the banks' take.
So you think you're signing up to a great discount, and you are in the short-term, but the banks will make up the difference over time when the rates change again. Sneaky!
One way to avoid such a scenario, is to compare interest rates with an organisation who is independent to all the different banks. They have the ability to shop around and get you the best discount regardless of who you bank with...
The second thing you can do (and also highly recommended), is to talk to a mortgage advisor who has your best interests at heart, and spend some time properly planning out your mortgage structure long term.
This will set you up in the short and long term, and protect you against rising interest rates in the future.
If you want to know more about managing interest rate repayments, read about the snowball strategy here.