Home loans are a complicated subject, especially for first-time home buyers.
What’s the difference between variable and fixed interest rates?
Do I need an offset account?
What’s the story with mortgage insurance?
Add these questions to the fact that there is a seemingly never-ending list of mortgage lenders to choose from, and you might be tempted to rent forever.
Don’t give up on your dream of home ownership just yet.
It may be confusing at first, but we’ll explain what to look out for when comparing home loans.
The higher your initial deposit, the lower your Loan to Value Ratio (LVR). A low LVR means low risk for lenders and can make you a more appealing customer.
The biggest point of comparison between lenders is interest rate. The lower your interest rate, the less you’ll pay over the life of the loan.
Your loan structure can also determine how much you’ll pay during your loan term. Choose from a fixed loan, variable loan, or split it between the two.
What's your deposit?
First things first: how much have you saved as a deposit?
The higher your deposit, the less money you'll have to borrow.
The less money you borrow, the better your rate might be.
Your deposit determines your LVR, or Loan to Value Ratio.
Put simply, the LVR is the amount you're borrowing from the lender.
It's expressed as a percentage that represents how much you're borrowing against the overall value of the home.
Lenders love borrowers with a low LVR, because that means less risk to them.
Are you going to live in the home?
Are you buying a home that you're going to live in or an investment property?
The answer to this question will affect your loan type and interest rate.
Lenders may offer owner-occupiers a different type of loan than they will to an investor.
It may also impact the features you're looking for in a home loan.
Home loan fees
We'll give it to you straight: there are a lot of fees associated with buying a house.
Between solicitor's fees, pest inspections, and stamp duty, you may feel like there's a leak in your bank account.
Brace yourself, because the fees don't end there.
Expect to come across several fees associated with your home loan.
Some of these may include:
Establishment fee for starting a new loan
Annual fees to keep the loan going
Discharge fee when your mortgage is paid in full
Redraw fees if you choose to redraw
Lender's Mortgage Insurance (LMI), required if you have a deposit of less than 20%
Early exit fee for paying your home loan off before the end of its term
Late payment fees for payments that arrive after the due date
There is some good news, because not all of these fees will apply to each loan.
For example, if you never make a late payment, you don't have to worry about that fee.
When you're shopping around, it's still a good idea to factor in any additional fees associated with a home loan.
There are certainly ways to become more financially savvy when it comes to paying off your home loan.
Options include budgeting, refinancing, opting for an offset account and altering your monthly repayments.
No one solution will work for all, but we'll look into each option so that you can decide what's right for your personal circumstances.
Principal + interest loan
When you take out a principal + interest loan, you're paying down the original amount you borrowed (the principal) as well as the interest.
In theory, this loan will be totally paid off at the end of your loan term.
With an interest-only loan, your payments cover the interest, not the principal.
Overall, this loan type is likely to cost you more because the principal stays the same.
However, you may be able to reduce the principal by making additional payments. This loan type is a common choice for investors.
Speaking of interest, it’s time to talk about interest rates.
These are what you’re looking at right off the bat when you’re comparing home loans.
The lower the interest rate, the more money you save over the life of the loan.
Your interest rate may change over the loan term, depending on the way you structure your loan.Compare & Save
The way you structure your loan can make a big difference to the amount you pay over time.
Homeowners will usually have the opportunity to change their loan structure during the life of their loan.
With a fixed loan, you can lock in a low interest rate for approximately 2-5 years, depending on your lender.
After your fixed loan term expires, you'll automatically switch to a variable rate.
At this stage you should have the option to secure a new fixed-rate loan, but it will likely come with a new interest rate.
Keep in mind that fixed rate loans often cap the amount of extra payments you can make during the fixed-rate term.
Your interest rate varies, usually in keeping with the official cash rate.
However, your lender can change the rate, in either direction, at their discretion.
Leverage your options and divide your loan up into a fixed and variable rate loan.
You choose how much of your mortgage to fix, and how much to keep variable.
This can be an advantage if the interest rate is dropping but you don't want to leave your entire loan to chance.
Home loan features are often an afterthought, and while they’re not as critical as interest rates, they can be pretty important.
Think about the extra features that you value in a home loan, and look for mortgages that can offer them.
Here are a few features to consider:
An offset account is a savings account linked to your home loan.
The amount in your offset account 'offsets' the balance of your home loan.
You are only required to pay interest on the amount of the home loan minus the offset.
While this is a great feature, it can also come with additional fees.
If you don't keep enough money in the offset account, it may not be worthwhile.
With a redraw facility, you can make extra payments on your home loan that can be redrawn at a later date.
The advantage of this is that you're reducing the principal, which means less interest.
The trade-off is that there may be fees to redraw or to have the redraw feature on your loan, even if you don't use it.
When you open a home loan, you're also opening a financial account with your lender.
Some home loan packages automatically include a credit card with the lender, which can have perks (like rewards points) and drawbacks (like annual fees).
Managing your account
Though it might not be a dealbreaker, consider how you would like to manage your account.
Are you the kind of person who likes to visit a representative in person at the branch?
Or do as much as possible through a user-friendly app on your phone?
Consider these features when making a decision.
Which loan is right for me?
Choosing a home loan is a personal decision, one that depends on your finances, family goals, and preferences.
Figure out what your priorities are and shop around to find a home loan that meets them.
Although it can be confusing at the beginning, increased choice ultimately gives you the opportunity to find the best loan for your situation.Compare & Save
This guide is opinion only and should not be taken as financial advice. Check with a financial professional before making any decisions.