Short term, low interest rates should be considered carefully

12/12/2014 17:36

The Consumer Council of Fiji is advising consumers intending to get a home loan to seriously consider their long-term financial status before choosing their home loan interest rate options.

This comes after a Council home loan survey found that fixed short-term low interest rates may not benefit consumers especially when variable interest rates are applied in the longer-term of a loan.

The Council surveyed six financial institutions between August - October 2014. The survey was intended to gather information on the various fees, charges and interest rate and also to gauge the level of difficulty or hassles that one has to go through when doing home loan comparison.

Our survey shows home loan interest rate ranges from as little as 3.25 % fixed for 6 months offered to a high variable interest rate of 7.50%.

The Council has found that banks often try to lure customers by offering fixed short-term low interest rates. Consumers enjoy low interest rates for a very short and fixed period, but then for the longer term pay higher rates. For example, two banks offer a 6-month fixed low interest option (3.25% and 3.95% respectively); however, after this period the consumer will be required to pay the variable interest rates which can go up to 6.25% or 7%. We have found that consumers coming off the fixed short-term interest rates generally end up paying more than 25% in monthly repayments. Consumers who are not careful will experience a sudden hike in their monthly repayment to the bank after the short-term low interest period is over.

A consumer who chooses this short-term option will experience the greatest hike in their monthly repayment. Going for the short fixed-term option can result in a monthly repayment-shock for consumers who are not careful. Consumers who are not prepared will experience bill shock when they suddenly see a significant increase in their monthly repayment as the variable interest rates start to kick in.

Various financial institutions are offering home loan packages like grocery specials on a supermarket shelf waiting to be snapped up. However, in order to do so, consumers must be in a position to exercise a large degree of responsibility in comparing fees and charges, interest rates and other costs between various financial institutions, before engaging in any deal.

With property prices sky rocketing there are very few people who can afford to buy homes outright with cash. Decision to choose the financial institution for home loan must be basedon consumer’s ability to service their loans if interest rate rises by 3 to 4 per cent. The Council is urging consumers to always plan ahead and anticipate the highest interest rate hike (for example 7% to 8%) to understand their financial position.

Consumers should be aware that a home loan is a long-term commitment and they should be mindful of their financial situation years down the line and not be lured by short term fixed interest rates. It’s a fact that a cconsumer’s financial status can change due to various reasons such as loss of job, sickness, personal disasters, rise in cost of living and so forth. With this in mind the consumers must understand the cost of borrowing and their ability to pay when there is a change in the interest rates.