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Tips for comparing home loans
A home loan (also known as a mortgage or home finance) is a loan from a bank or financial institution for purchasing a property. These loans have typically longer terms, usually 25 or 30 years. The payments likely will be set either fortnightly or monthly. There are many different variations of home loans to suit individual financial needs.
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, fixed, and split rates). Home loans are asset assured, meaning that the loan is secured against your property. If you cannot continue the payments, the lending institution may require you to sell the property to settle the debt.
Why should I compare home loans? Are all home loans the same?
No, home loans are as variable as prospective homebuyers. There are a multitude of loans from different lending institutions. It’s worthwhile to research your mortgage before committing to the first one you find because home loans are long-term loans, and as such, even a small difference in interest rates or fees can significantly impact the final cost of the house.
Who is eligible for a home loan?
If you’re interested in securing a home loan, but you’re not sure 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 a little hard in 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 be 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 causal 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 fill into one or more of the above criteria. However, your options may be limited. You may need to rely on getting a cheaper place, saving for a larger deposit, using equity in an existing home or taking out lender mortgage insurance (LMI).
Do I need preapproval?
Preapproval can make the home buying process smoother and easier. Essentially, preapproval is when your home loan lender “conditionally” preapproves you for a loan up to a certain amount once looking at your finances, employment, and other outstanding debts.
Prospective home buyers with preapproval 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. Preapproval will also speed up the documentation process.
How much does a home loan cost?
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 costs and fees. 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 important to calculate these costs to see the true cost of a home loan.
What about interest rates?
A home loan’s interest rate is the other key piece that will determine the total cost of a home loan. The “comparison rate” is the key rate to look at, as it encompasses all of the fees and demonstrates the cost as an annualised rate. Home loans are offered with three interest rate types: variable, fixed, and split.
Variable interest rates can fluctuate over time. Borrowers can benefit from this type of interest rate if the interest rates are cut during the life of the loan, but they can also end up paying more if interest rates are increased. These loan payments typically differ from payment to payment.
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 during the fix 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 interest rates. Some lenders charge a fee for each split, while others do not charge a fee.
What else should you compare when looking for a home loan?
The following should be considered when you compare home loans:
This 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 costing associated with home owning and reducing the financial strain for the first few years.
Interest only loans are generally suited best toward investors. Interest only loans only require that the borrower pay the interest rate accrued and not the principle 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 payment for renovations, home improvements, purchasing a vehicle, or 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.
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.
What mortgage features should I know about?
Extra payments. Most loans allow you to make additional payments so you can pay off your loan more quickly.
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.