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How to compare bad credit home loans
Home loans are as variable as the prospective homebuyers. There are a multitude of loans from different lending institutions. It’s worthwhile to research and compare your home loan options before making such a long-term commitment. Small differences in interest rates, terms or fees can significantly impact the overall cost of the owning a home.
Before you begin to compare bad credit home loans, it’s a good idea to come prepared with an understanding of what type of mortgage you require and for what purpose.
- How much are you looking to spend on a property?
- How big is your deposit?
- Is it an investment property or will you live in the property?
- Are you after an interest only or principal and interest home loan?
- What features do you want with your home loan?
Additional types of bad credit home loans and features to consider
Consider the following when you research your options:
- Introductory home loans. These can be a great option for first-time home buyers because these loans offer a lower interest rate for the first year or two, lower upfront fees and charges helping you reduce the overall financial strain for the first few years.
- Interest only loans. Interest only loans are generally suited best toward investors. Interest only loans only require that the borrower pay the interest accrued and not the principal of the loan. This allows investors to purchase a property and make a minimum amount of payments on it.
- Line of credit/home equity loans. These loans allow you to borrow against the equity of the property to pay for renovations, home improvements, purchasing a vehicle and more. Lines of credit are also a great choice for those who are building their own home to draw funds to pay for the construction.
- Self-Managed Super Fund (SMSF) loan. A SMSF is a super fund where its members can direct the investment strategy (different than a standard super fund). In 2007, superannuation rules changed to allow Australians to use their super funds to borrow and purchase property. Many financial institutions now offer loans specifically for this situation.
- Offset account. An offset account is a transaction account linked to an eligible home or investment loan. The money you have in this account could offset the amount you owe on that loan, and you’d only be charged interest on the difference.
- Extra payments. Many home loans allow you to make additional payments. However, some loans and loan types limit the number of additional repayments.
- Repayment holiday. This allows you to take some time off from paying the loan in the event of an unforeseen circumstance (like injury or illness). Some lenders only allow this if the loan is paid ahead of schedule.
- Redraw facility. Withdraw extra payments made if your financial situation changes and you need additional money.
- Rate lock. Typically, only offered for fixed rate loans, it ‘locks’ the price in (usually for a fee), so that in the time it takes for the loan to be approved, the rate will not change.
- Portability. In the future, if you decide to sell your house and purchase a new one, you can transfer the existing loan to the new house to avoid additional fees on a new loan.
How to find the lowest home loan rates on BestFind?
Use the filter in our home loan comparison section to adjust your criteria and narrow down your options, until you find a suitable home loan for your situation.
You can sort and compare the products by either the comparison rate or by the approximate monthly repayments, to find the cheapest home loan for you.
What is a good home loan interest rate?
Interest rates lower than 4% are generally considered a good interest rates.
However, it is important to keep in mind that different features and loan purpose types can significantly impact the interest rates.
Moreover, many of the lowest rate mortgages may have limited features and are only available to customers that meet the lender’s financial requirements.
Calculate your mortgage repayments
The total cost of the loan includes not only the amount of money borrowed, but also interest accrued over the life of the loan as well as any additional fees and charges.
There are three types of fees you will encounter when applying for a mortgage:
- Upfront fees. These fees include application fees, settlement fees, valuation fees, legal fees, Lenders Mortgage Insurance (LMI), and stamp duty.
- Ongoing fees. Repayments, annual fees, monthly fees, redraw fees, and offset account fees.
- Exit fees. Title discharge fees and break costs.
This is a general overview of some of the fees you could incur during the home loan process. Each loan will differ so it is important to compare and calculate these costs to see the full cost of a home loan.
Other types of loans to compare
Your home loan will fall into one of these categories, based on why you are buying the house.
Home loans also come in different interest rate structures (variable rate loans, fixed, and split rates).
Who is eligible for bad credit home loans?
If you’re interested in securing a home loan but unsure you’re eligible, consider speaking with a mortgage broker. Brokers earn a commission from the lending institution when you take out a loan, they therefore work hard to ensuring you get a loan that’s appropriate for you.
If you find yourself in one or more of the following situations, you are less likely eligible to secure a home loan:
- You have impaired credit
- You are on a low income
- You are on a pension
- You are self-employed
- You are a casual or seasonal worker
- You have a temporary visa
- You do not have a down payment (but you have a pre-existing home with equity available)
- You are on maternity leave
- You are on a single income with a child or children
- You recently transferred to a new job
You could still potentially get a home loan if you fall into one or more of the above criteria. However, your options may be limited. You may need to rely on getting a cheaper property, saving up a larger deposit, using equity in an existing home or taking out lender mortgage insurance (LMI).
Do I need pre-approval?
Pre-approval can make the home buying process smoother and easier. Essentially, pre-approval is when your home loan lender “conditionally” pre-approves you for a loan up to a certain amount once looking at your finances, employment, and other outstanding debts.
Prospective home buyers with pre-approval will be able to negotiate harder because they will be considered a preferred buyer. It will offer the sellers increased confidence that you’re serious and have the ability to afford the house. Pre-approval will also speed up the documentation process.
Understanding home loan interest rates
You will notice that banks advertise two types of interest rates, an “advertised rate” and a “comparison rate”.
When comparing bad credit home loans, you should focus your attentions towards the “comparison rate” as it takes into account your upfront and regular fees, and more accurately demonstrates the “true” cost per annum.
Home loans are offered with three interest rate types: variable, fixed, and split.
- Variable interest rates. Borrowers can benefit from this type of interest rate if the interest rates are cut during the life of the loan. However, mortgagees can also end up paying more (if interest rates raise) and experience a lot of variance in their monthly repayment.
- Fixed interest rates are set at a fixed rate for a stated period (usually one to five years). While a borrower with this type of interest rate may not enjoy the savings if interest rates are cut, they will also not be subject to interest rate hikes throughout the fixed term. This interest rate structure is good for setting a budget, because the monthly payments will remain consistent.
- Split interest rates allow you to enjoy some of the benefits of both fixed and variable rates loans. Some lenders charge a fee for each split, while others do not charge a fee.