Many people would say that the best home loan is the one with the lowest interest rate. Yet if this were the case, we would not see borrowers regularly choosing loans with higher interest rates.
The truth is all loans are not equal. If you scratch below the surface (i.e. the interest rate) you will see a suite of features, fees, and facilities in the home loan package. So how do you make sense of these?
The best loan for you will depend upon your current situation, your future plans, and your property. Each one of these factors influences what options you are most likely to need. An experienced finance specialist can help you make sense of all the options and find the best package for you.
Before speaking with your broker, it is a good idea to get familiar with some common home loan terms. Below is a quick reference guide to give you a head start.
To make comparing loans easier, the government requires all lenders to use a standard formula to calculate the comparison rate and display this alongside their advertised interest rate. The comparison rate is the true interest rate calculated based on a certain standard income and loan to value ratio. The comparison rate also considers hidden fees and costs which may hidden in the fine print.
Lenders will provide an option to ‘fix’ the interest rate for a certain period, such as several years. This gives budget conscious borrowers confidence around their repayment requirements and protects them from interest rate increases. The downside is that borrowers will not benefit from interest rate decreases.
This loan feature allows borrowers to fix a portion of their loan, while keeping the rest unfixed. This lets them balance the risk of interest rates falling or rising while also giving a degree of security around repayments.
An offset account is an everyday bank account which has an interest rate to match your home loan. This means that your interest is negated for equivalent amount of money held in the offset account. If you have a $250,000 loan and $50,000 in savings in your offset account, you will only pay interest on $200,000.
This provides you the ability to pay off your loan faster by paying more than your required regular repayments or by contributing larger lump sums periodically.
A redraw facility allows you to with draw any of the additional payments you have made against your loan. So, if you are $10,000 ahead on your repayments, you can take this out to spend anyway you like.
This allows you to freeze your repayments for several months if you experience a downturn in your income such as maternity leave or loss of work. The missed interest repayments will be added onto the sum of your loan.
The standard loan period is 25 to 30 years however some borrowers may offer extended loan terms of 35 years or more. Having a longer loan term can reduce your repayments and help with cashflow. The downside is you will pay more interest over the life of the loan.
Generally, a 20% deposit is recommended when buying a property as it gives access to the widest range of loan options. Low deposit home loans are available for those with 5% or 10% deposits. These often come with higher interest rates, fewer features, and lenders mortgage insurance fees. Under specific circumstances, it may be possible to get a loan with as little as 1.5% deposit however borrowers will generally have to proof a strong financial standing and savings pattern.
Most banks will require lenders who have less than 20% deposit to pay Lenders Mortgage Insurance. This is a lump sum which can be capitalised into the loan or can also be paid upfront at settlement.
A loan top up allows you to access the equity within your home to use as cash. Loan top up features are great for investors, as they avoid the need to re-finance or change loans to withdraw equity. They are also great for homeowners who may want to do renovations etc.
Loans with fixed interest terms will specify the amount of interest payable within the fixed loan period. The bank expects to receive this amount of interest over the course of the loan agreement. If you choose to exit the loan early, you may need to pay this difference along with any other exit fees.
The fees often contain the nitty gritty of what the loan will cost you. While some loans may claim low interest rates, they may make up for this with high fees. Below is a list of the most common fees to look out for.