by Lisa Montgomery 21/02/2007

No Such Thing As A Free Lunch? Gimmicky Home Loans On The Rise -  Borrowers Warned To Read The Fine Print

Holidays, free flights, plasma screen TVs, discounted petrol, and retail vouchers. They all seem very enticing, particularly when offered with a home loan, but according to leading non-bank lender RESI Mortgage Corporation, borrowers should read the fine print first, before succumbing to the lure of a free gift.

RESI’s Head of Consumer Advocacy, Lisa Montgomery, says borrowers should investigate and compare the true cost of the loan, and base their decision on that, rather than what an upfront ‘gift with purchase’ can give them.

“What borrowers may not realise is, there is no such thing as a “free” gift with their loan” explains Ms Montgomery. “Invariably they will be paying for their own gift through certain loan conditions such as an establishment fee, a higher interest rate or inflexible loan terms.”

“The old adage of ‘look before you leap’ applies before signing on the dotted line for any loan, and never moreso than in the current competitive loan environment,” she adds. “Your loan will be around much longer than the initial joy that a free gift may give you.”

Ms Montgomery says borrowers should look at the five key elements of a home loan when making their decision. These include:

• A low interest rate
• Low or no fees
• Flexibility
• Useful features of the loan
• Level of customer service

“When a borrower is comparing products based on this criteria, the difference between loans can add up to tens of thousands of dollars over the life of the loan,” says Ms Montgomery. “When they weigh this up against the cost of a free gift, the choice should become very clear.”

For example, while the offer of a plasma TV costing around $3000 may seem attractive in the short-term, when compared to a 0.25% interest rate differential on a $240,000 home loan over 25 years – the decision could cost the borrrower $12,000 in interest.

Ms Montgomery added that these types of special offers or promotions are becoming increasingly popular through mortgage broker networks who offer the special promotion as an incentive for choosing that broker.

However, Ms Montgomery says borrowers should take a step back and become more personally involved in such an important long term financial decision.

She says if people are prepared to do their own leg work and compare the basic features of the loans that suit their individual circumstances, they can be sure and confident they have made the correct decision for them, saving themselves considerable money.

“Home buyers also need to take stock of all loan fees and charges attached to a home loan such as ongoing account-keeping fees, redraw fees and fees for professional packages. Where RESI does not charge any ongoing account keeping fees for professional packages, some lenders can charge up to $300 a year.”

Ms Montgomery says in a market where the borrower has so much choice there is no reason to be taken in by the immediate appeal of a gift. “The best gift a borrower can give themselves is the loan which suits their long term financial needs, and one which they choose themselves.”