Pop a cap in your home loan

To “pop a cap” is a common and mostly American piece of street parlance meaning to shoot someone or something. Now I’m not here to propagate the shooting of mortgage brokers or the riddling of bullet holes in your home loan agreement (as much of a thrill as it may be). What I am here to talk about is the popping of a different kind of cap. Last week, Bankwest launched Australia’s first capped home loan, the Bankwest Capped Rate Home Loan, a move which is likely to cause quite a stir in the home mortgage market.

So, what exactly is a capped home loan? Well the basic premise is this – for a fee, Bankwest are guaranteeing that the interest rate on your home loan will not go above a certain level (7.5%) until November 2011. Bankwest will first put you on a variable rate (currently at 5.4%) and if the rates go down you will pay less, but when they go up you’ll only pay up to the maximum rate. Bankwest is essentially selling ‘peace of mind’ given RBA increases are now a reality and the inevitable recovery of world economies after the global financial crisis.

It sounds like a no-brainer – competitive rate, a guarantee on rates for 3 years all for a nominal fee  – or so Bankwest would have you believe. What’s the catch you say? First off, you’re paying more than you would for a normal loan in fees. To get the cap, you have to fork out a fee (0.15% of the loan amount). If you’re borrowing $250,000 for example, this fee totals $375. Moreover, unlike any other variable rate loan by Bankwest, the exit fees for leaving is set at 1% of the loan outstanding at the time of exit – quite a sizeable amount if you’re only 2 years into paying off a loan of that size.

The real deal breaker in the whole equation however is the capped rate. Is it worth paying the extra fees to safeguard against interest rates going above 7.5%? Will rate rises go above and beyond the 2.1% needed to make the cap effective? Only time will tell, but it is a lot of interest rate rises in just 3 years. Moreover, if you are worried by rising interest rates perhaps you would derive more security in fixing all or part of your loan? Bankwest’s 3 year fixed rate is a good 40 basis points lower than the cap’s upper limit.

Despite the potential drawbacks, this home loan product could be heralded as the opening salvo of what is sure to be an intriguing period in the Australian home loan market as interest rates begin to rise. What will be interesting is to see how the market, particularly, the ‘Big Four Banks’, respond to Bankwest’s initiative. Watch this space, as there’s sure to be plenty more shots fired in the coming months.

Compare Home Loans with Mozo.com.au

Pop a cap in your home loan was last modified: June 13, 2012 by Yash Murthy

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5 Comments - Write a Comment

  1. Public J homebuyer · Edit

    I found this article a number of things; informative, well-communicated and even slightly entertaining. To the good people at Mozo I say ‘Huzzah!’

  2. Herbert Fotheringtonshireham · Edit

    I think that BankWest’s product is a a great idea! However it does mean that they are expecting rates to stay below 7.5% otherwise they wouldn’t offer a product like that. Good article from Yash. Sounds Colombian.

  3. Interesting product indeed! I’d heard about it, but until I read this didn’t realize what the pitfalls were. Quite insightful.

    A well written piece I thought. I liked the ‘pop a cap’ thing – I didn’t realize home loans could be so ghetto!

  4. I agree with Herbert. clearly BankWest are expecting that the RBA won’t be upping interest rates anywhere near what the banks would need to justify a 7.5% variable rate. maybe locking in a fixed rate at the moment is the way to go (provided its under 7.50%). i believe the term is ‘bust a cap’. however i generally prefer to bust a groove, and when i’m feeling particularly hip, i will bust a rhyme.

  5. What many are forgetting these are emergency interest rates to keep the public spending. There is no way that the current rates can be sustained forever.

    As we move into a healthier upturn of the market, the interest rates will go back to what they were pre-GFC.

    So if it goes back up to 10% (unlikely but possible) this is a really good initiative.


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