Issue Date: Thu 4-Oct-2018
Article Source: https://www.smh.com.au/money/borrowing/beware-banks-interest-rate-teaser-tricks-20180...
Beware banks' interest rate teaser tricks
As first home buyers find themselves in the box seat in the property market, banks are hungrily competing for this growing source of business
That can mean there are cheap finance deals out there for first home buyers, but also some traps waiting for people with no experience taking out a mortgage. One such potential trap is what's known as an “introductory" or "honeymoon" interest rate.
Banks lure new customers with introductory rates that revert to a higher rate after a honeymoon period.
These are rates that are designed to entice you in, with a juicy discount that lasts for a year or two, before reverting to a higher level.
Like so many promotions in finance, some disciplined types who are on top of the detail can use introductory rates as a way to save themselves money. But for plenty of others, these loans could leave you facing a sharp increase in repayments further down the track.
And this is one reason why, critics say, these sorts of deals are a reflection of the faux competition we have in banking.
Introductory or "teaser" rates are fairly common in credit cards, deposits, home loans or insurance. "Honeymoon" mortgage rates are often pitched at first home buyers who are scrambling to make their finances stack up, in particular.
What’s wrong with that? The obvious danger is that it can lead to shock when the honeymoon ends, and repayments jump.
Mozo, a comparison website, says 21 lenders on their database have honeymoon offers, and introductory rates last between one and three years. When this ends, rates go up by an average of 0.75 percentage points, which is equal to thousands of dollars a year on a typical loan.
Over a 25 or 30-year loan, that quickly adds up to tens of thousands of dollars.
And remember - it's also likely that variable interest rates will probably rise in the next few years, on top of any honeymoon rates expiring, so the increase from today's repayments will probably be even bigger.
For these reasons, Mozo's Kirsty Lamont says teaser rates are just another way in which banks can appear competitive at the outset, without putting much of a dent on the profitability of the loan over the longer term. They probably don’t stack up unless you plan to refinance when the honeymoon ends.
"Most consumers don't want to have to refinance their home loans every couple of years," she says.
Banks offering honeymoon rates include CBA, Westpac, Bankwest and Bank of Queensland.
But rather than be lured in by "honeymoon" deal, many first buyers may be better off negotiating an interest rate discount that will last the life of the loan.
The same is true of other "introductory" rates, such as those on savings accounts, which tend to disappear after a few months. But with home loans, the amounts of money at stake are typically much larger.
As banks' behaviour gets more scrutiny, this sort of pricing has recently drawn fire from some powerful critics.
The Productivity Commission, in its influential June report on competition in finance, singled out introductory rates as a sign of the weakness in competition in banking.
But hang on - how could discounts be a bad thing?
Because, the PC said, teaser rates are a type of “price discrimination.” It’s a way for banks to only make cut-price offers over a short time-frame, for a smallish number of customers (those taking out new loans, or considering refinancing.)
The fact banks can selectively offer good deals like this to a minority of customers is a way of "curtailing" the competitive pressure from the more active "subset" of customers, the PC said.
The Reserve Bank also said this month that its own figures showed discounts on loans were ramping up, with the average rate paid on a new loan falling by about 0.2 percentage points since August last year.
The lesson for consumers is there are indeed competitive home loan deals in the market. But they are only going to new customers, or those prepared to negotiate with their bank. And even then, think twice before opting for a deal that only remains competitive for a year or two.
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