Borrowers target discount loan products

By Terry Ryder, 14th May 2011

Borrowers are increasingly choosing ongoing discount products on offer, according to mortgage broker Mortgage Choice.

During April every state saw a rise in demand for this loan type – which accounted for 30% of Mortgage Choice’s new loan approvals nationally.

The popularity of fixed-rate loans also increased, from 10% in March to 12% in April, reversing the falling popularity for fixed rates in the early months of 2011.

“Ongoing discount rate home loans have shot ahead to be the number one choice for Mortgage Choice’s new customers,” says spokesperson Kristy Sheppard. “They accounted for 30% of our loan approvals in April, jumping five percentage points on March’s result.

“Ongoing discount and fixed rate home loans were the only product types to experience an increase in demand nationally last month. This was the case in almost every state, with the exceptions beingVictoria and South Australia.

“Consumer conservatism is seeing Australians taking advantage of discounts and bargain shopping wherever they can. This includes their home loan.”

The demand for standard variable rates dropped to 28% of new loan approvals in April from 30% in March and basic variable home loans fell to 22% from 25%. The popularity of line of credit home loans, which are often popular with investors, dropped one percentage point to 4% of approvals while introductory rate loans remained relatively steady at 4%.

Financial comparison website RateCity says first-home buyers should consider introductory or honeymoon rate home loans with caution. The warning follows evidence of a growing number of introductory home loan applications, perhaps driven by recent advertising campaigns by lenders.

RateCity’s CEO Damian Smith says introductory-rate home loans can cause long-term financial strain for a very short-term reprieve.

Many lenders offer an introductory home loan deal with a discounted interest rate for a short period of time. RateCity monitors 70 introductory home loans with the majority offering a discount for the first 12 months.

“While a discounted interest rate might be tempting when entering the property market for the first time, once the honeymoon is over the interest rate always reverts to a much higher rate than what you could find from another home loan.”

Smith says first-home buyers are the most vulnerable to sudden increases in interest rates at the end of a honeymoon period.

“The real concern is that first-home buyers will be under the most financial strain if they choose an introductory home loan, than any other borrower. That’s because they are new to the property market and they are more vulnerable to interest rate rises because they are more likely to be younger and earning less so their proportion of income to repayments is higher.

“Once the honeymoon period ends and you have to pay hundreds of dollars more each month, the extra costs for one year of reprieve probably won’t be worth it.”

RateCity found that introductory rate home loans on average cost borrowers over $16,000 more than ordinary variable home loans (comparing variable intro rate loans with a 12-month honeymoon period for a $300,000 loan size).

ENDS