Blog What to consider when comparing home loans

What to consider when comparing home loans

29 April 2021
What to consider when comparing home loans

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Looking for a home loan can often be a daunting and stressful task. If you can’t make heads or tails of all the jargon being thrown at you, we’ve broken down some of the most important factors to consider when shopping for a home loan.

Interest rate

A home loan interest rate is one of the most important things to consider when looking for a mortgage. Your interest rate determines the amount of interest charged each month, so the lower your interest rate, the lower your monthly repayments will be. A difference in rates of as little as 10 basis points could mean thousands saved in interest costs over the life of your loan.

We’re currently offering a special discounted variable rate of 1.99% p.a. for one year (2.47% p.a. comparison rate) on our Smart Booster home loan.

Fees

Getting an ultra-low interest rate can often be rendered obsolete if you’re paying multiple exorbitant fees. Home loans can have upfront, ongoing, and exit fees. Some upfront fees you may encounter are application fees, property valuation fees, conveyancing fees, legal fees, and Lenders Mortgage insurance. Examples of ongoing fees include monthly service fees, annual fees, redraw fees, late payment fees, and switching fees. Exit fees are few and far between but you may have to pay discharge fees or early exit fees.

Where possible, you should try to find a loan that has as few fees as possible. Our Smart Booster home loan has no monthly or ongoing fees.

Comparison rate

The comparison rate is arguably more important than the headline interest rate. It incorporates all of the fees you’ll pay over the life of the loan into the advertised interest rate, revealing the true cost of the loan. Be wary of lenders advertising ultra-low rates with high comparison rates. That typically means you’ll be paying lots of expensive fees over the life of the loan.

Loan type

There are two main types of home loans, variable and fixed. A variable home loan means your interest rate isn’t locked in, so your rate could rise or fall, typically in line with Reserve Bank cash rate movements. This means your monthly repayments could get cheaper or more expensive, depending on the state of the economy. A variable rate home loan typically has more flexibility than a fixed, and often comes with more features, like an offset account and the ability to make extra repayments.

A fixed-rate loan means your interest rate is locked in for a period of time, typically one to five years. Your interest rate won’t be changed in this time and neither will your monthly repayments. This cash-flow certainty often appeals to first home buyers, who often struggle with the leap from rent to mortgage repayments. Once the fixed period ends you’ll revert to the lenders' standard variable rate for the remainder of the loan. It’s important to note, it’s typically not advised you refinance a fixed-rate loan as the break costs can far exceed the savings refinancing may afford you.

If you like the idea of both these loan types you could opt for a split loan. A split loan means some of your loan balance is charged at a fixed rate and the other at a variable rate. You can split the loan however you like, provided the lender approves, whether that's 50:50 or 70:30. For example, if you had a $600,000 loan and wanted to fix 30% of it, $180,000 of the balance would be charged at a fixed rate and the remaining $420,000 would be charged at a variable rate.

Loan term

A home loan typically spans from 25 to 40 years, depending on the lender and the borrower. It’s typically advised you opt for as short a loan term as you can afford, in order to save yourself on interest costs.

Loan features

Loan features can help you to pay off your loan sooner and potentially save you thousands. An offset account acts as a transaction account attached to your home loan, with the balance offset against your home loan balance when interest is calculated. For example, if you had a $500,000 loan with $50,000 in your offset account, you’d only be charged interest on $450,000.

Another home loan feature that may appeal to you is a redraw facility. When you make extra repayments on your home loan, these build up in a separate space to your regular repayments, and can be made available for withdrawal. You can use these funds for things like a holiday, renovations, or as an emergency fund.

Making extra repayments is another viable home loan feature. Some lenders will charge you for this or have a cap on how many and how much your extra repayments can be. We allow unlimited additional repayments.

If you’re looking for a home loan and want to see how much you can borrow with us, check out our borrowing calculator.

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