Finding the best home loan for your new home

In Domain’s survey of Australian property buyers, 41 per cent of respondents thought “finding the best mortgage” was a stressful experience. For 14 per cent, it was the most stressful part of buying their home. Being armed with all the right information on home loans will not only help you make the right decision, it will also help relieve some of the stress of the process.

To begin with, ASIC’s MoneySmart website suggests asking for a key facts sheet from a variety of lenders, which will allow you to directly compare features and fees.

Using a mortgage broker can be a big help. According to William Johns, Senior Financial Planner and Managing Director, Health & Finance Integrated, “An experienced mortgage broker can help the buyer better understand their options, match the customer with the right loan provider and educate the buyer about the loan facility and how it should be used to maximise the benefits.” Best of all their services are usually free.

What is my borrowing power?

You’ll need to work out how much you can borrow. Your income and your expenses will determine this. Use a borrowing power calculator to determine the amount you can borrow.

Related: home loan repayment calculator

Which loan features are right for me?

Next you need to work out what features are right for your situation.

Principle and interest loans:

• are the most common type of loan
• mean the buyer pays off the principal (the amount borrowed) and the interest together in regular repayments
• mean the borrowed amount will eventually be repaid in full, usually over a long period such as 25 or 30 years.

Interest only loans:

• allow buyers to pay the interest only for a fixed period of time
• are useful in the short term as they allow smaller repayments
• are helpful if you are buying an investment property
• mean your total repayment will be greater.

Variable, fixed or split interest rates?

Variable rates:

• are linked to the cash rate
• provide the most flexibility and the least restrictions – you can usually make extra repayments at no cost if you come into some spare cash
• mean you will reap the benefits of any interest rate drops
• mean you must be able to work an interest rate rise into your budget.

Fixed rates:

• give you certainty regarding the amount of your regular repayments
• mean you won’t pay more if interest rates increase
• mean if something changes in your personal life and you need to reduce payments, make extra repayments, redraw, or even sell the property, you could be facing high break-costs and other penalties and fees.

Split rates:

• offer the best of both worlds, designating a certain amount with a variable rate and an amount on which rates are fixed.

Other loan features

Other key features of home loans include: offset accounts, redraw facilities and line of credit loans.

An offset account can save you a lot over the course of the loan. It’s a savings account linked to your mortgage. Your interest will be calculated on the loan minus the amount in the offset account, so you reduce your interest each day that money is in the offset account.

A redraw facility means you can make extra payments into your loan and still be able to redraw them later if you need the money. Some lenders have fees and conditions around redraw facilities, so be sure to ask.

A line of credit is a loan that allows you to draw on your equity up to a set credit limit. You only pay interest on the amount actually used and you will need to have a decent amount of equity in your home to apply. This can be useful if you have an irregular income and might need extra funds from time to time.

Other benefits of loans can include credit cards, insurance packages, access to discounts on other products and more. Be aware that often the more features the higher the cost, whether it be in the interest rates or fees. It pays to do your homework before committing.

Fees

All loans have fees of some sort, but some have more than others. Lenders have to tell you about all fees and charges before you sign up for your loan and most can be easily found on their website. Shop around and make sure you gain a clear understanding of all fees and charges.

Who should I borrow from?

The big banks generally offer loan packages that include bank accounts, credit card facilities and other services. Medium-tier lenders cannot always match these so they tend to compete on interest rates. Security is not a big concern for any lender as all Australian credit providers are regulated by ASIC to ensure the consumer has adequate protection.

Vendor financing – where the owner of a property offers the buyer finance – is an alternative to traditional lending. Typically, a buyer might choose vendor financing if they have little or no deposit, a lower income or a problematic credit history that makes traditional borrowing more difficult.

According to Johns, vendor finance schemes usually attract a higher interest rate – typically up to 2–3 per cent higher than a standard bank loan. They are also risky because as a buyer you have little or no protection under the National Credit Act and may not have access to external dispute resolution should a problem arise. “Professional legal advice is highly recommended prior to entering into these arrangements,” says Johns.

When deciding on the right home loan, you should take into account all the elements and flesh out the right option for you. Remember, if an offer seems too good to be true, it usually is. Read our guide on hidden pitfalls of low interest rate loans. Once you decide what you want, it’s time to apply.

Reassessment

According to Johns, regular reassessment of your home loan facility is important to ensure you are meeting your obligations to the bank and to avoid any nasty surprises such as dishonour fees.

It’s also wise to reassess your home loan every few years, or if your circumstances change, to make sure you are getting the best interest rate and home loan package you can find. Of course, refinancing comes with its negatives too (mainly more fees and charges), so be sure to do the sums to make sure it’s worth your while.