I have been asked by a few clients recently about the range of “Special Offers” made by banks and lenders, specifically, are they worth it?
Firstly, banks may offer rate discounts of 0.7% or more depending on the amount you borrow. Usually the higher the loan amount, the greater the discount. Sometimes the offer is a little different; say 50 cents off a litre of petrol for a year.
My approach is simple; just work out the exact money savings to do the comparisons, don’t just look at the rate or the offer itself. In other words, ask the question: exactly how much will I save?
Here is an example.
Say you are borrowing $300000 and the bank is offering a discount of 0.7% off the standard variable rate of 8.07%. This is offered as part of a “professional” package (all banks have their own name, but let’s use this generic name), that attracts an annual fee of $300. At face value this means you get a rate of 7.37%.
Now, how does this translate into actual cash flow?
The monthly repayment on $300000 at 7.37% over 30 years is $2071
Add monthly component of package fee $ 25
Total $2096
Compare this with a similar loan from another bank at a rate of 7.4%
The monthly repayment on $300000 at 7.4% over 30 years is $2077
Nil monthly charge $ 0
Total $2077
This means that the loan at 7.37% is actually more than the loan at 7.4%!
Another vital point about this is that the loan amount actually lessens as you pay it off, but the yearly fee does not, and so, the loan actually gets more expensive as the years roll by.
This is something to be very careful of.
I should mention, however, that with higher loan amounts the comparison may change in favour of the “professional” package, so the figures need to be worked out accurately for every loan scenario.
The bottom line is this. Don’t just look at the rate or the money you might save. Do the figures accurately and compare apples with apples.
If you can’t do this yourself, call me on 1300 133 193 and I’ll go over the figures with you.
