Buying a house is the biggest purchase most people will ever make. Because of the high stakes involved, choosing the best home loan to buy that house is crucial. It isn’t easy to get your foot in the property door.
To know if you’re choosing the best home loan for you, it’s important to understand the factors involved in your mortgage. Here are some of them:
Home loan features
Paying attention to the features of the loan is just as important as considering the low interest rate. You need to understand the purpose of the loan's features so you can use them your advantage. Here are features to look for:
- Extra repayments: Being able to make extra repayments on your home loan can help reduce the interest you pay and the term of your loan. This feature is only available if you choose a variable-rate loan. The extra payments can be redrawn if you need the funds for any emergencies in the future.
- Redraw facility: This feature enables you to get the money back if you make extra repayments towards your home loan. Keep in mind that some lenders impose a fee when you redraw funds.
- Offset account: A savings or transaction account that is linked to your home loan. The money you have in your offset account offsets the balance of your home loan, reducing the amount of interest you pay.
- Lump sum: This type of extra repayment is a single large payment, rather than a series of small payments.
- Interest-only: With an interest-only loan, you are only required to pay the interest on the loan for a period of time and not the principal. But your repayments will revert to the principal and interest repayments once the term is done.
Types of home loan
Other than the loan features, the type of home loan is another thing to think about. Generally, there are two types of repayments to choose from are fixed rate and a variable rate. Like any other financial product, there are pros and cons to this.
- Fixed rate: A fixed rate home loan offers an interest rate set for a period of time. The main benefit of this is that your repayments are fixed, so this makes budgeting easier. However, a fixed rate is not flexible. You need to pay a break fee if you want to make extra repayments, or when you want to refinance. Also, rate cuts will not apply to you.
- Variable rate: The interest rate will rise and fall over the life of your loan. So your interest rate will vary. A variable rate loan is much more flexible, it has more features, and it’s easier to switch loans. However, budgeting can be harder because you need to keep up with your repayments if the interest rate rises.
Fees will affect the overall cost of your home loan. Choosing a lender that has low fees could save you thousands of dollars. Here are some fees to watch out for:
- Application fees: This fee is paid only once to the lender for setting up a home loan.
- Break fee: This fee will apply to you if you want to get out of a fixed rate during the fixed rate period.
- Extra repayments fee: Another fee that will apply when you want to make additional repayments on a fixed rate loan.
- Lender’s Mortgage Insurance (LMI): If your deposit is less than 20% of the property value, your lender will charge you for LMI. This insurance protects the lender in the event that the borrower cannot repay the loan.
- Late repayment fee: This is levied when you pay later than the due date.
- Ongoing fees: These are charged either every month or year for administering your loan.
- Valuation fees: Your lender will charge this to determine the value of the property you want to buy.
These are just some of the many fees that may be charged on your home loan. It’s still best to ask your lender about the mortgage fees and additional costs to get a better overview of your home loan. Moreover, using a home loan calculator, asking for a key fact sheet from your lender, and comparing comparison rates are helpful tools to compare home loans.