There’s plenty of choices to make when you’re buying a home – from choosing the suburb, right down to the colours of the walls.
One of the most crucial choices to make on your home buying journey is choosing the right home loan.
We’ve narrowed it down to five key areas to consider when you choose a home loan:
- Home loan type: Why are you getting a home loan?
- Loan size: What is my loan to value ratio?
- Interest rates: What interest rate should I choose?
- Home loan features: Do I need a flexible home loan?
- Fees and costs: How much does it cost to apply for a home loan?
1. Home loan type
Are you a first home buyer or refinancing an existing mortgage? The type of home loan you choose differs to why you need a home loan.
| Why do I need a home loan? | Home loan type |
|---|---|
| To buy a place to live in | Owner-occupied loans |
| To buy a property to rent out | Investment loans |
| To build a home | Construction loans |
| To find a better interest rate | Refinance home loans |
| To use the equity in my home | Equity loans |
| To renovate my home | Renovation loans |
Depending on the type of borrower you are, there are home loans catered for different niches:
- If you have a low deposit, low deposit home loans options are available.
- If this is the first time you’re buying property, first home buyer loans are a good way to start.
- Loans for self-employed applicants.
- If you’re a permanent resident or an Australian living outside of the country, non-resident mortgages can help you buy a property.
- If you have impaired credit or missed a few repayments on your credit card, choose from the plethora of bad credit home loan options.
Each of these home loans come with qualifying criteria that are unique to your circumstances.
2. Loan size
The loan to value ratio (LVR) is the percentage you borrow against the value of the property you’re buying.
LVR is calculated by dividing the loan amount by the actual value of the property you’re buying.
An LVR of 80% or below is considered low risk by most lenders. If the LVR is above 80%, then you will have a pay Lenders Mortgage Insurance (LMI).
LMI fees can cost thousands of dollars. Fortunately, there are ways you can reduce the cost of LMI or avoid them altogether, like increasing the size of the deposit or getting a guarantor home loan.
Tip: Getting pre-approved for a home loan lets you know how much you can borrow so you go look for properties within your price range.
3. Interest rates
The interest rate determines how much repayments you’ll make over the life of your home loan.
Fixed vs variable interest rates
A fixed-rate home loan offers you a specified interest rate for up to five years. Since you know how much repayments will be, budgeting is easy; however, fixed mortgages come with less flexibility.
A variable rate home loan offers a fluctuating interest rate, i.e. it changes according to what the bank/lender has set. A major benefit of a variable interest home loan is that when rates go down, your repayments also decrease.
| Point of difference | Fixed-rate home loans | Variable-rate home loans |
|---|---|---|
| Repayment certainty | Repayments will stay the same during the fixed loan period. | During the life of the loan, repayments will fluctuate according to the variable interest rate. |
| Costs | Break costs incur if you switch during the fixed loan period | There are no break costs if you switch. |
| Interest rates | Will remain the same even if banks change their interest rates. | Will change according to the interest rates decided by the bank. |
| Extra repayments | There is usually a limit on how much extra repayments you can make | There are no penalties for making extra repayments, and it is usually unlimited |
| Offset available | Not available | Usually available |
Tip: A split home loan lets you fix a portion of your mortgage and leave the remainder on a variable rate.
Advertised vs comparison rates
Advertised rates are the interest rates the lender will charge on your home loan, while comparison rates factor in the fees and costs associated with getting a home loan.
Be wary of introductory rates or honeymoon rates, which are only available for a short period. While the low-interest introductory rates are enticing, it will revert to a higher interest rate, so be sure to read the fine print for these offers.
4. Home loan features
Variable home loans usually come with several features to help you manage your home loan and pay off the loan faster. These features include:
- Extra repayments: Allows you to make additional repayments along with scheduled repayments.
- Lump-sum repayments: Similar to extra repayments, however, you pay off a larger sum of money and is usually a one-off event. This lowers your remaining balance.
- Redraw facility: This will help you access any extra repayments you’ve made.
- Repayment frequency: You can choose between making repayments on a weekly, fortnightly or monthly basis.
- Interest-only: Interest-only loans pay off the interest charged, so it does not reduce the balance of your home loan.
- Offset account: An offset lets you put money into another account, which reduces the balance upon which the interest is calculated.
- Repayment holidays: You can choose to not make repayments on your home loan for a set period. However, repayment holidays extend the life of your loan, and you end up paying more interest.
- Home loan top-up: Only available once you’ve built equity in your home, and it allows you to borrow extra funds on your existing home loan for renovation projects.
Making larger repayments makes sense as you pay off the home loan earlier and the bank will charge you interest on the remaining balance.
However, these features usually come at a cost, which would outweigh the benefit if you don’t use them at all.
Talk to our mortgage brokers about how you can potentially make use of these home loan features so you can manage your home loans effectively. Call us on 1300 889 743 or fill in our free assessment form.
5. Fees and costs
Applying for a home loan comes with a plethora of fees like:
- Application fees: One-off fee paid when you apply for a home loan
- Property valuation fees: These are charged when need to get a valuation report for your home. We know lenders who offer free upfront valuations.
- Annual fees: These are charged for the upkeep of your home loan.
- Late payment (default fees)
- Fees for using home loan features like redraw, offset accounts, etc.
Besides application fees, home buyers also need to pay stamp duty (unless you’re a first home buyer), LMI fees and legal fees.
These can significantly add to the upfront costs when getting a home loan, so weigh your options carefully.
Tip: Avoiding these fees might not be the right solution for you, as a home loan with a high fee but competitive interest rates will perform better in the long run.
Get help from a mortgage broker
If you’re still confused about which home loan is right for you, it’s best to take the help of a mortgage broker.
At Home Loan Experts, our mortgage brokers know the lending policies and home loan products of over 50 lenders.
We can find the right home loan solution for you.
Call us on 1300 889 743 or fill in our free online assessment form.