Donnette

As a specialist in the Home Loans area in Australia 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?

First, 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, will I save money.

Here are some examples.

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 lets 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 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.

Now, what about cheap petrol?

One popular offer at the moment is that you will save 50 cents a litre for a year. The actual website quotes that you could save $2080 over a full year. Subject to the following conditions: Offer limited to 52 purchases over a 12 month period (maximum 4 per month except for December, March, June and August when a maximum of 5 purchases applies), up to a limit of 80 litres of fuel per individual purchase. Promotion applies to funded new money Standard Variable or Discount Variable loans of $150,000 or greater.

The petrol deal applies to loans currently quoted at either 7.99% or 7.59%, ie the Standard Variable Rate or the Discount Variable Rate respectively. Lets look at the best case scenario at 7.59%, and for the sake of comparison I will also assume there are no monthly fees.

Monthly repayments on $300,000 loan over 30 years at 7.59%: $2116.16
Monthly repayments on $300,000 loan over 30 years at 7.4%: $2077.14
Monthly cost of the free petrol: $ 39.02

On the strength of these figures it will take 4 and a half years until the cheaper loan starts to get ahead, so it looks like a reasonable deal, unless you dont use enough petrol! The bottom line is this. Dont just look at the rate or the money you might save. Do the figures accurately and compare apples with apples.

Michael is the owner of Home Loan Answers, the BEST site for Home Loan Information in Australia. You will also find great tips on how to get the best credit cards and personal loans plus an opportunity for you to get personally tailored information so you can choose the best deal to suit your circumstances.