How to choose the right home loan
When choosing a home loan, buyers can often experience information overload. These are the key things to consider before making a decision.
Choice is at an all-time high – and that mightn’t be a good thing. Studies have shown that too much choice can be demotivating, so when it comes to choosing home loans, with all the variables of the infinite products – not to mention the jargon – demotivation can be debilitating.
“It’s like dialling in all the possible combinations of a safe,” says Aussie Home Loans chief executive James Symond. “But you wouldn’t buy anything on a whim anymore without shopping around.” So where to start? Before checking out the Domain Home Loans online comparison tool, read on as we break it down for the layperson.
Go for broker
The number of loan configurations out there is extreme. Aussie Home Loans brokers alone have access to 2700 loan products by the 21 lenders on their panel. “Do you go to an ear specialist because you’ve got a problem with your hearing or try and diagnose it yourself?” asks independent broker Brian Wood. You need to compare application fees, valuation fees, monthly fees, fixed or variable interest payments.
“It’s bloody complicated,” says Aussie chief executive James Symond. “A good broker should be able to hold your hand and help to navigate you through it all.” Domain Home Loans will put you in touch with the appropriate brokers once you communicate your needs via a simple online process. When you’ve found a broker you trust, the rest should fall into place.
A matter of interest
A big consideration when shopping for a home loan is fixed versus variable interest rates. Interest rates are particularly low right now so fixed rates might sound tempting, but this does lock you in so that high break costs would apply if you wanted to relocate or repay the loan early. Some fixed loan products do allow extra repayments, but they normally come with restrictions. If you’re not allowed to make extra repayments at all this could cost you in interest for the long term. “Don’t try to beat the bank,” says Symond. “It’s very hard to predict if you’ll save with a fixed rate over the next three or five years.”
Split the difference
Fear not if you can’t decide: there is a middle ground. Fixing at least part of the loan could be a better option for you. A split loan allows you to make extra repayments in the variable portion of the loan while still giving you the security of a fixed rate.
Deciding between a fixed or a variable interest rate on a home loan is one of the biggest influencing factors.
Every dollar counts
Interest rates aside, there are all sorts of other fees to take into account when choosing a home loan, and fees and establishment costs can make a big difference to the total you pay.
“Pay attention to the comparison rate, which takes fees into account, making it easier to compare loans,” says Symond. Some common fees include application and valuation fees, ongoing monthly or annual fees as well as lender’s legal fees and the lender’s mortgage insurance (LMI). Legal fees can include the valuation of a property.
The LMI can apply if you don’t have a 20 per cent deposit and it could end up costing you thousands of dollars. It insures the lender, not you, in case you default on the loan. It wouldn’t absolve you from the debt either – the insurer can still chase you for it. Ultimately, it’s best to keep the LMI costs down by saving up as high a deposit as possible; even a small difference in the deposit can make enough of a difference in the LMI cost.
Beware the break cost. Fixed-interest loans can have high exit fees, especially if the variable interest rate is lower than the fixed rate you’re paying. If you want to get out of the mortgage, you may have to make up all the lost interest the bank would have made if you’d paid the higher rate through to the end of the fixed term.
Checking what bonuses different loans offer is another way of checking if it is right for you.
What to look for
There are some bonuses that could really help you, for instance the opportunity to make extra repayments via a redraw facility.
“With many loans, if you make extra payments you can get the money back later, which can have considerable tax advantages and provide useful security as you can store your savings in your mortgage,” says Symond.
Some mortgages will even allow you to take a “repayment holiday” for a short period. Some have a mortgage offset facility that allows you to deposit money in an account and receive interest in the form of a reduction in the interest due on your loan. Finally, there’s the option of paying interest only, which can be a useful feature for investors, but is being frowned upon by the major lenders now.
Talk to friends or family
Don’t underestimate the value of word-of-mouth advice from someone you trust. Most Aussies love to talk about real estate and offer advice on brokers or loan types based on their own experience.
Choosing a home loan is all the more daunting because you’re essentially making a decision that will have an impact on the rest of your life! “And it isn’t just as simple as signing up for one then paying it off bit by bit over 25 or 30 years,” says Symond. “They need to be flexible and have a range of different benefits to suit many different borrowers.”