A low interest home loan = a good home loan?

A good mortgage isn’t just about the rates. The lowest rate does not immediately translate into a good package. Let’s think about it for a moment, if a bank decides to lower your mortgage rate for a particular mortgage loan, much lower than its competitors. What does the bank earn? If the bank cannot earn from you at the designated low interest rate, can you think of some other method of earning from you? Of course it does!

Many of these low rate home loans are packaged with all sorts of terms and conditions. Here’s a real life example: A former client of mine got a mortgage with a really low interest rate. However, that rate was only fixed for the first year and you have to lock yourself in the bank for the next 3 years. The rate for the next two years was structured as floating rates, which means that they could change at any time. If it goes down, you win. If it goes up, you lose. Simple as that.

Lured by the freshman’s fee, he couldn’t resist the temptation and took that package. He will see, many instruments in the financial market are constantly changing and mortgages are one of those few that can offer you something fixed for a determined period. Getting a well-structured mortgage gives you peace of mind and allows you to focus on other investments. Why give yourself more headaches by picking up on something without fixing it when everything around you is already so uncertain?

The rate went up dramatically in the second and third year and ate up your existing income. Since she had monthly savings plans, insurance, and a couple other things to pay off, her disposable income had to take a hit.

It wasn’t that bad for him, but you can imagine things could get worse with a couple of unforeseen circumstances. What if he has to take a pay cut and still has to pay off all the debts and insurance? Add a son who is going to study at the university next August. You get the idea.

Sure, you might be thinking of refinancing. A word of caution: Banks typically offer you a low rate as a claim, and they’ll lock you in with all sorts of terms, returns, and conditions. If you decide to refinance after enjoying the low interest rate, you may find that you may have to pay a large amount of “penalty” to your current financier before moving on to the next. Mathematically speaking, that move might not be so attractive after all.

The only way to save yourself from all this kind of trouble is to get it right the first time.