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Mortgage Lenders Tactics – How It Costs You!

mortgagetacticsI have been in the mortgage industry for a number of years now and the tactics lenders employ make me think twice about which are the most reputable.

I would like to share some of my insights on how the banks and other lenders manipulate interest rates to gain your business and cost you more in interest repayments than you initially thought when you signed on the dotted line.

I know the old premise of “buyer beware” and “it is all stated in the contract” but I do not think the tactics used are all that ethical

Below I have outlined some of the tactics you should be aware of before considering or signing a mortgage offer.

1. Introductory Interest Rates – This tactic attracts potential borrowers to the low initial rate compared to other lenders variable rates.  All to often these products offer a great interest rate for the first year or two but usually work out to be more expensive after the introductory period has ended. Switching loan products or refinancing after the introductory term has expired ends up being the same if not costing Also, if you forget to switch or refinance then you can expect to pay significantly more for your mortgage.

2. Promotional Products– Often lenders will offer a heavily discounted interest rate on a particular loan product for a limited time only to attract new business.  The products are sold as a full featured variable rate home loan – not an introductory rate. This tactic often works with brokers recommending and borrowers flocking to this product. After a year or so the lender increases the variable rate on that product and eventually borrowers end up paying the same rate as everyone else.

For example, a lender might offer a full featured home loan product at 0.25% less than all its competitors. Let us say they were offering a rate at 6.25% while the major banks and other lenders were offering rates around 6.50% to 6.60%. After a year so the lender increases the interest rate. Effectively, the borrower pays the same if not more for their current home loan compared to other lenders who consistently offer the same interest rate to the public.

3. Website Interest Rate Comparison – On many smaller lender websites I often see these lenders favourably compare their products to the major banks and other lenders. “Save over $70,000 compared to Commonwealth Banks (or any other banks) standard variable rate.” However, they do not mention other loan products offered by the bank that are more competitive than the banks standard variable rate. Personally, I do not know many borrowers who pay the standard rate for their home loans.

4. Delaying Interest Rate Rises – Back in 2007/08 when interest rates were rising, I noticed some lenders delayed passing on the interest rate rise by more than a month some times up to 3 months. You might think this is good but it unfairly conned potential borrowers to make enquiries and perhaps taking out a loan with this lender. Later they find out that their interest rate is no more competitive if not more expensive than other lenders products.

5. Delaying Interest Rate Cuts– Whenever there is an interest rate cut announced by the Reserve Bank of Australia I feel that 1 or 2 weeks is a fair time period for lenders to pass on the rate cut. After a 2 week period I feel the lender is  profiteering from their clients. I have heard that some lenders took  up to 2 months to pass on an interest rate cut.  For example, if you have a $300,000 home loan and your lender took 4 weeks to pass on a 0.25% interest rate cut you would effectively paying an extra $62. Multiply this by all their customers loans and that lender has made a healthy profit.

6. High Exit Fees – Most banks charge between $700 and $1,000 to exit the mortgage within 3 to 4 years. Some lenders charge a percentage of the original loan amount for exiting the loan with 5 years. This can be an expensive exercise if the loan is paid out or refinance. For example some lenders charged 1.5% exit fee during the first 5 years. On a $300,000 loan the exit fee would be $4,500. 

This does not cover all the tactics lenders use but are some of the ones I have noticed. If you have any other examples I would love to hear from you.

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