Thinking About Buying Your First Home?

How to Compare and Choose a Home Loan That’s Right For You 

There’s no doubt that shopping for a home loan (mortgage) can be a frustrating and confusing process.

Not all home loans are created equal. Each comes with different options and features.

The one thing worth noting is that it pays to know a bit about interest rates.

A home loan is a long-term debt, so you want to make sure that you find one that is right for you. 

The following information explores the different aspects of home loans and how to compare them.

Loan Terms

Your loan term is how long you have to pay off a loan.

The length of your loan repayments determines how much interest you’ll pay.

A shorter loan term (20 years for example) means you pay more in repayments but less in interest.

A longer loan term (30 years for example) means you pay less in repayments but more in interest.

Always choose the shortest loan term that you can afford.

Principal and Interest Loans

This is a popular choice among homeowners. You make regular repayments on the amount borrowed (the principal) plus interest on that amount.

You pay off the loan over an agreed period (loan term).

Interest-Only Loans

Your repayments only cover the interest on the amount borrowed – for an initial period (5 years for example).

The thing to remember is that you are not paying off the principal you borrowed. This means your debt isn’t being reduced.

Although the repayments may be lower during the interest-only period, it will only increase after that.

You want to make sure you can afford the repayments after the interest-only period has lapsed.

Fixed Interest Rate

Fixed interest rates stay the same for a set period (5 years for example).

However, the rate can either go to a variable interest rate or you can negotiate a fixed rate.

Below takes a look at the pros and cos.

Pros:

• Makes budgeting much easier as you know what your repayment will be.
• Fewer loan features could cost you less.

Cons:

• You won’t get to enjoy the benefits should interest rates go down.
• It may cost more to switch loans later. This is where a break fee comes in. 

A break fee is when you ‘break’ your fixed-rate mortgage. It’s worth noting that this fee may be very high.

Generally, the lower the interest rate, the higher the break fee will be.

Variable Interest Rate

A variable interest rate fluctuates depending on the lending market changes.

Below takes a look at the pros and cos.

Pros:

• More loan features may offer you greater flexibility.
• If you find a better deal down the track, it’s usually easier to switch loans.

Cons:

• More loan features could cost you more.
• Makes budgeting harder as your repayments could go up or down.

Partially-Fixed Rate

If you’re like most Aussies and not sure whether a fixed or variable interest rate is right for you, consider incorporating both.

A partially-fixed rate (split loan) means that a portion of your loan has a fixed rate and the rest has a variable rate.

You can decide how to split the loan. For example 50/50 or 20/80.

Average Interest Rate

Below is a guide of the average interest rate for new homes loans as of May 2020.

The thing to note here is that even if you shave off 0.5% from your interest rate, you could save thousands of dollars over time.

Home Loan Features To Look Out For

Home loans with a lot of options or features can come at a higher cost. Such features could include:

• offset account
• redraw
• line of credit

An offset account is a transaction account that is linked to a mortgage account.

It reduces your interest payable as interest is only charged on the net balance.

A redraw gives you access to any extra money you have deposited into your home loan.

A line of credit allows you to use a single account for both your home loan and everyday spending.

Interest is added to the loan each month and repayments are only needed when the loan is over its credit limit.

This allows you to access the equity in your home loan without having to apply for a new loan.

The bottom line is that they’re ways of putting extra money into your loan to reduce the amount of interest you pay.

Tips For Comparing Mortgage Features

• Avoid paying more for ‘nice-to-have’ options. Consider your lifestyle and what you need as opposed to what are ‘nice-to-haves’.
• Ask yourself if it is worth paying extra for features you may never use? At the end of the day, you may find that you’re better off choosing a basic loan with limited features.
• Always be realistic about what you can afford. In any case, give yourself breathing room for ‘rainy days’.

Comparing Mortgage Features 

Comparing Home Loans

• Compare loans from at least two different lenders.
• Keep in mind when using comparisons sites, they are businesses and may make money through sponsored links.

In Conclusion:

Check the interest rates, application fees, monthly repayments and extra features such as a line of credit or redraw.

Consider if the extra features are what you need as opposed to what you want.

But more importantly, compare loans from at least two different lenders. 

Please share this article to anyone who may benefit from this information.

Thinking about buying your first house?

Phone me, Benjamin Collins on (07) 3041 1382. Alternatively, send me a message on LinkedIn.