Online Home Loan Comparison Sites Can Cost You $33,730
By Adam Grocke
Online home loan comparison sites are all the rage at the moment and it is easy to see why: simply jump online, punch in your details and compare every available home loan on the market. What a great concept... until it costs you $33,730.
Let me show you why chasing the lowest interest rate home loan can be a costly mistake.
Michael Jackson is a first home buyer looking to purchase for $350,000. He has a $50,000 deposit and aspires to own two properties. His 10 year plan is to purchase now, pay off his loan as quickly as possible and then use the equity to purchase a larger house to live in. He will then rent out his first home as an investment. His parents have used this strategy and have done quite well.
MJ uses a home loan comparison site and selects the lowest interest rate on offer with no fees and no frills. It happens to be 0.25% cheaper than his current bank! Perfect! MJ is happy and has worked out that he will save approximately $793 per year in interest. This equates to a saving of $7,930 over a 10 year period.
Unfortunately, one thing the website failed to do was consider MJ’s goals, his key objectives and which loan structure and features were suitable to meet his 10 year plan. Without obtaining the correct advice, MJ is now facing an overall loss of $33,730. Here’s how…
Let's fast forward 10 years from now where MJ has paid $100,000 off his home loan. He now has enough equity to purchase a larger home and rent out his first home. He is on track with his goals and life is good. At this stage, MJ makes an appointment with a mortgage broker because an investment property is now involved and he needs to consider tax deductions. Bad news... the broker tells MJ “you’ve done it backwards, you’ve moon walked better than Michael Jackson singing Billie Jean!!!” While MJ has done very well to pay off his loan so quickly, once he moves out of his first house, he is told that he will be able to claim the interest on the loan as a tax deduction. This is the key factor that the home loan comparison site missed, the fact that MJ intended to rent out his first home once it was paid off. The correct structure would have been for MJ to pay interest only loan repayments on his first loan and utilise an offset account to save the money he would have paid off the loan. This would ensure that MJ claims his full tax deductions once his first house becomes an investment property.
If we now take a look at the figures over 20 years and compare MJ’s decision to chase the lowest interest rate vs obtaining finance advice from a mortgage broker.
$793 per year in savings from refinancing to a lower interest rate. This equals in $7,930 savings over the first 10 years and $15,860 savings over 20 years.
Mortgage Broker savings
A good mortgage broker can achieve the same interest rate as a home loan comparison site so the savings in refinancing to a lower interest rate is the same as above, $15,860 over 20 years.
The savings from receiving the advice equates to $17,870 in tax refunds for the second 10 years of the loan when it is rented out as an investment (this assumes MJ is earning $60,000pa, the interest rates is 5.5% and his extra tax refund per year is $1,787)
Total savings of $33,730!!
So the moral of the story is simple; MJ was making the biggest financial decision of his life and like many others he was determined to chase the lowest interest rate without considering a wide range of contributing factors. Home loans are complex and had MJ received advice from a professional mortgage broker he would have saved $33,730. The best advice is to get advice!