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Why you should compare home loans?
Home loans are used for buying property, either for investment purposes or personal use. Because they involve much larger sums of principal, they’re usually for the long term. If you’re committing to regular repayments for anywhere up to 30 years, therefore, you’ll want to compare the market first!
A home loan comparison is the best way to start if you’re looking for a mortgage that suits your financial situation. While you’ll find a diversity of home loans during your comparison, most will fall into one of several broad classes. Different mortgage products are tailored for different purposes:
Home loans are secured, so the property you’re purchasing is guaranteeing the loan. If you’re unable to make repayments on time, you’ll need to sell off the property to service the debt.
Another way mortgages vary is in terms of interest rate. On comparing different mortgages, you’ll find both fixed and variable rate home loans, as well as split rate loans.
In short, mortgage products are tailored for many diverse consumers, so there are lots (and lots) of different products. A key thing to note early on in your comparison, however, is that small interest rate differences add up. Over such a long term, they can make a considerable impact on the total price you pay for the property.
Am I eligible for a home loan?
To answer this question, here’s a list of things to consider when doing your home loan comparison. Succinctly, these are circumstances that could impact negatively on your application:
- You have a poor credit history
- You earn relatively low income
- You’re self-employed, a casual, or seasonal worker
- You’re not an Aussie citizen or permanent resident (e.g. you hold a 457 visa)
- You haven’t got the means to make a deposit
- You’ve just started a new job
- You’re on maternity leave
- You’re a single income family and have children (or a child) to support.
Most of these factors determine the level of risk you present to a potential home loan provider. Don’t despair, though, it’s still possible to secure a mortgage if one or more of the above describes you. You could consider looking for a less expensive property, or putting aside for a bigger down payment, for a start. Lenders might also consider you if you have a current property with equity that you can use for the home loan. Or, you could apply for lender mortgage insurance (LMI).
Another quick way to get an answer to this question is by consulting a mortgage broker. Often, this is free for you, as brokers get commission from the mortgage provider if you sign up. It’s also the reason they’ll make an effort to find you a home loan that meets your needs and circumstances!
What is pre-approval? Do I need it?
Technically, no. But pre-approval can very much simplify and speed up the process of getting a home loan approved. Pre-approval is what your potential mortgage provider might give you on assessing your liabilities, finances, and employment status. If everything checks out and you’re considered relatively low risk, you can be given ‘pre-approval’ by the lender. It’s considered a huge advantage when it comes to negotiating a property price because it demonstrates you mean business!
What costs can I expect for a mortgage?
Good question, and one you should ask before you start your home loan comparison. Besides interest and the loan principal, you’ll want to think about additional costs and fees when you compare products. Three key types of fees to look for during your comparison are:
- Upfront costs/fees: Application fees, setup fees, stamp duty, LMI, legal fees, and valuation fees all come under this heading. All upfront fees are paid by you when your loan begins.
- Maintenance/ongoing fees: These are paid, as the name suggests, on an ongoing basis. They include annual or monthly fees, redraw fees, offset account fees, and of course, your repayments.
- Exit fees. Exit fees usually apply if you switch home loan providers, or pay off your debt early. They can include title discharge fees.
Each and every loan will be different, so add up these fees when you’re doing your home loan comparison. You’ll find this gives you a better idea of how much you’ll pay overall.
A low interest home loan can be great, but it’s recommended you look at comparison rates at the same time. Comparison rates are annualised rate figures that consider both the fees and interest on your loan. So, two loans with identical rates can have different comparison rates if one involves more in fees than the other.
As we mentioned, interest rates can be fixed, variable, or split. Each has pros and cons to keep in mind when you compare:
- Variable rates will increase and decrease with market rates. Repayments for variable rate mortgages will change each month. The key pro is that when market rates drop, you pay less interest. Accordingly, you pay more when they rise.
- Fixed rates remain constant for the duration of your home loan. You won’t save money if market rates drop, but you’ll be happy with your fixed rate if market rates hike upward! Another strength of fixed rates is you know exactly how much you’ll be paying each month and overall, making budgeting easier.
- Split rates give you some of the upsides of variable and fixed rates. You may be charged for each split, or you may not, depending on your lender. These can be worth looking out for when you compare mortgages.
What other types of home loans should I compare?
These loan types are worth looking into during your comparison:
Interest only loans: Designed to benefit investors, borrowers only repay the accrued interest on these mortgages and not the loan principal. They let investors buy property and make fewer payments all up.
First home buyer/introductory loans: For the initial year or couple of years, introductory home loans charge lower interest and lower costs for home ownership. This aims to ease the financial burden for the initial period.
Self-managed super fund (SMSF) loans can be found quite frequently, being offered by many financial institutions. SMSFs are super funds that enable members to choose their investment strategy, for instance, to borrow them for property investments. These have been around since 2007 when Aussie superannuation regulations changed.
Home equity/Line of credit home loans can be beneficial if you want to build your own property and need to finance construction. They let you borrow the equity of the property to fund home improvements, remodelling, or buy a car, amongst other things.
Features worth considering
When you compare home loans, the following loan features can often add significant value to you as a borrower. In the table above, you can compare these by clicking ‘fees and additional info’.
- Rate locks will ‘lock’ your interest at a certain rate while you go through the loan approval process. Often, you’ll find these only with fixed interest rate loans, and they’ll have a fee attached.
- A redraw facility lets you make additional repayments when you’ve got the funds, and withdraw them later if you need to.
- Additional repayments may or may not come with fees. In general, making extra repayments are a plus if you want to settle your loan early.
- Repayment holidays apply if an unexpected event makes it difficult for you to make repayments for a while. Sometimes, mortgage providers will permit this only if you’ve been early on your repayments.
Portability lets you transfer an existing mortgage over to a new property if you sell your house and buy another. Portability can help you skip the fees you’d otherwise pay taking out a new loan.