Budget Home Loans – the problems

This month I’ve had a couple of clients mention really cheap home loan rates they found on the internet. “Gee whiz that was a great experience and I saved thousands”, are words I’ve never heard after a client has used one of these lenders. Let me explain. 
1. Pricing is ‘conveyer belt’ style – this means that the lender attracts new customers by offering a cheap rate initially. The longer the customer stays with the lender, the more their rate goes up. Meanwhile, newer customers continue to enter at the start of the ‘conveyer belt’ at the cheap rate. Complaining doesn’t help, especially because there are no humans to complain to. 
2. So why not leave? Ah ha – you think that’s an option, until you look at the fine print and realise that they are going to sting you with significant discharge fees. In addition to the fees, the lenders also make the exiting process very difficult, especially as there are no humans to assist. 
3. They will also hike up rates in a credit crunch much faster than regular banks. Why? Because in times of uncertainty, funders of banks are more comfortable lending to, say, CBA, than to, say, Loans-R-us. And why not leave? See Point 2, plus in a credit crisis other banks don’t want you because they have their own problems. 
4. Finally, these lenders might be, say, 0.25% cheaper than a major bank today. In the cycle of loans, 0.25% is basically nothing and only one out-of-cycle increase!