“Which bank offers the lowest interest rate for their mortgage or loans?” and “Is it a fixed or floating interest rate?” are two of the most obvious and often asked questions by people while researching home loans from banks. However, they should not be the only criteria.
Adrian Jefferson, a veteran in the mortgage industry with over 16 years of experience, shares a list of five features to look out for when getting a mortgage or home loan from banks, apart from interest rates and whether they are fixed or floating.
TL;DR on what to look out for in a bank home loan
Features to look out for in a bank mortgage
- Free conversion?
- Partial prepayment fees?
- Waiver of penalty due to the sale of the property?
- Cash rebates or legal subsidies?
- Interest offset scheme?
Put together; these features are more important than you think when taking up a home loan. Hence, do not simply opt for the bank with the lowest interest rates without considering these features.
Feature 1: Free conversion?
Is a free conversion of the mortgage allowed within or after a lock-in period?
A free conversion feature lets you change your loan package within the same bank without incurring administrative or conversion fees. This fee usually ranges from $500 to $1,000.
If you are to consider whether to remain with your existing bank or to switch to another bank, this could be a game-changer for you.
Some banks even grant you a free conversion if they offer better rates on the loans within your lock-in period.
Feature 2: Partial prepayment fees?
Is there a penalty imposed for early partial prepayment of the home loan within the lock-in period?
Suppose a bank offers the feature of no penalty for early partial prepayment of the mortgage. In that case, it essentially means that within your loan lock-in period, no fees are charged when you make a partial principal payment for your loan, as long as you notify the bank at least one month in advance.
Why would anyone make a partial prepayment of their mortgage? By making a partial prepayment of your loan, you’ll be paying down your principal amount, hence, reducing your total payable interest for your home loan.
Feature 3: Waiver of penalty due to sale of the property?
Does the bank offer a full or partial waiver of penalty due to the sale of the property?
Bank loan packages usually come with two to five years of lock-in period. If you decide to sell your property within this period, a penalty will be charged – an average of 1.50% of your current loan amount.
But some banks will grant you a full or partial waiver of up to 50% off on those fees charged, as long as you notify the bank at least three months in advance.
This saves you a significant amount of capital that could be used to invest elsewhere!
Feature 4: Cash rebates or legal subsidies?
Does the home loan offer cash rebates or legal subsidies?
When refinancing your property, the costs involved include legal and valuation fees.
Depending on your property type, these fees could work up to a few thousand dollars.
To help subsidise these costs, most banks include cash rebates or legal subsidies in their loan packages.
It would be in the form of either a cash payment to you or the bank may pay the legal firm directly.
But the caveat is that there is usually a 3-year clawback period. If you decide to leave the bank within this period, you’d have to repay the bank the full rebate amount – so keep a lookout for such terms in your loan package!
Feature 5: Interest offset scheme?
Does your mortgage package offer an interest offset scheme?
Some banks offer an interest offset scheme, which means that if you make an additional cash deposit into the bank, they will grant you the same interest rate on the deposit as your home loan.
This special interest rate for the deposit is typically higher than the savings interest rates available and applied on up to 70% of the deposit amount only.
This way, the interest accrued from your deposit will help offset the interest on your home loan. This effectively allows you to pay lesser interest on your home loan.
For example, Customer A gets a $2 million mortgage at an interest rate of 1.5% a year. He then takes up the interest offset scheme offered and deposits $500,000 into the bank.
The bank grants Customer A a 1.5% interest rate on up to 70% of the $500,000 deposit. This $350,000 will earn the same 1.5% interest to offset his $2 million home loan interest.
If you feel overwhelmed and because a mortgage is often a large quantum that magnifies any mistake, it is advisable to speak with a specialist mortgage consultant at no extra cost to you. If you would like to chat to find out more, feel free to drop me a message.