What is a scorpion loan?

Five of the worst ways your mortgage can sting you. Too many Australians have been stung by a scorpion home loan. It's a predatory mortgage deal that delivers a poisonous sting once you're onboard. Too often, the sting is so well hidden that it's not obvious when you first apply.

athena.com.au - Beware of scorpion home loans

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Beware of scorpion home loans

7 min | 12 Sep 2019

Five of the worst ways your mortgage can sting you

Too many Australians have been stung by a scorpion home loan. It’s a predatory mortgage deal that delivers a poisonous sting once you’re onboard. Too often, the sting is so well hidden that it’s not obvious when you first apply. And it makes your finances hurt like hell.

It’s almost criminal.

Yet home loan lenders are making hundreds of millions of dollars a year off loyal mortgage customers using these very tactics. Here are the worst stings to look out for when you’re shopping for a home loan to make sure you don’t get stung!

STING #1. Rate creep

How they get you:

Over half of borrowers don’t know their current interest rate¹, and the banks sneakily take advantage. They rely on poor transparency and customer inertia to put up rates on their loyal customers, costing Aussie borrowers hundreds of millions of dollars every year.

Watch out:

Rate creep is particularly ugly for fixed rate loans. Mortgage marketing focuses on shiny rates for a short fixed rate period, hoping borrowers don’t notice their loan defaults to a very high standard variable rate after that period. Super creepy! Check the comparison rate, if it’s higher than the standard rate, the scorpion is gonna get you.

How to avoid the sting:

Check your current interest rate. How does it compare with the rate you signed up for? Has your lender passed on all of the RBA’s interest rate cuts in full? If your rate has crept up, it’s a scorpion loan and it’s time to get out. If you are fixing your rate, what is the comparison and default rate after the fixed term? And make sure the comparison rate is lower. It’s the true cost of your loan.

STING #2. Shiny new rates only for shiny new customers

How they get you:

Banks tempt new customers with lower rates but leave existing customers on the higher rate. Worse, if you ask about the advertised rate, they’ll often say these rates are available to new customers only. You’re being stung just for being a customer!

Watch out:

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An investigation by the ACCC showed banks systematically overcharge loyal customers relative to new home loan borrowers² Since then this loyalty tax had grown even worse. Research suggests that the rate gap between existing customers and new customers may even be as high as 0.45% (and for some regional banks 0.60%)³. On a typical loan amount of $450,000 this could mean the difference of $33,000 over the life of the loan⁴.

How to avoid the sting:

When you’re looking for a new lender, call them and pretend to be an existing customer. Ask if you would be eligible for the lower rate they’re advertising. If the answer is no, it’s a scorpion loan! Loyalty is royalty at Athena. Our Automatic Rate Match means you’ll always score the same sexy rates on our like-for-like loans as new customers do.

STING #3. Fees for just about anything

How they get you:

Application fees, early exit fees, account maintenance fees… banks love to hide a bunch of fees in the fine print. If they can find a new way to sting you, they’ll do it.

Watch out:

If you ever catch a fee in your monthly mortgage summary, you’ll dismiss it because it’s small. But they add up. Did you know, according to the RBA, banks made $1.175 billion dollars from home loan fees in 2018 alone⁵?

How to avoid the sting:

Check the comparison rate which is the true cost of the loan, including fees and charges. If it’s higher than the headline interest rate, watch out! It might be because there are additional fees and charges, which will cost you more over the life of the loan. We hate fees as much as you do. That’s why Athena won’t charge any application, ongoing or exit fees on our home loans.

STING #4. The Mortgage Straitjacket

How they get you:

Life always changes, and when you need your home loan to change with you – like extra repayments, a redraw facility or the ability to pay out your loan early – many lenders will penalise you for using them or making changes, either with fees or even a higher interest rate.

Watch out:

Some lenders use an ‘exploding discount’ hidden in the terms & conditions. If you need a little flexibility on your loan – a variation, further advance, or other change in terms – the interest rate immediately jumps by as much as 0.66% – costing a typical borrower over $50,000 over the life of the loan. Ouch!

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How to avoid the sting:

Get a copy of the home loan key facts sheet. It sets out the features, interest rates and fees in a standard format, so that you can compare across lenders. All credit providers in Australia must supply one for home loans if you ask for it (but not for interest only or line of credit loans).

STING #5. The 30-Year Doom Loop

How they get you:

When you refinance, scorpion lenders will try and lock you in for longer and get more of your hard-earned cash. If you’ve already made headway paying off your home loan, you don’t have to go back to a 30-year loan term.

Watch out:

The longer you’re locked-in, the more money you’ll end up paying. It can cost you thousands of dollars in extra interest repayments if you revert to 30-years.

How to avoid the sting:

Don’t give in. Ask to keep your same loan term and don’t settle for anything else. Also ask if you can change your home loan term later down the track (without getting stung a fee).

Squash the scorpions!

There are so many dodgy things they do. Like failing to pass on the full benefit of the RBA rate cuts or delay passing on the savings; a common delay of 21 days costs Aussie borrowers as much as $100m⁶. As if the banks don’t have enough money! If you’re sick of it, do something about it. Sting them back and swap to a home loan that’s actually going to help you smash down your debt, not add to it. Life’s too short for a long home loan. Schedule a call on 13 35 35 or at athena.com.au/contact with a home lending expert from Athena today and see how you could start saving a whole lot of time and money.

athena.com.au - Beware of scorpion home loans

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