If you thought comparing home loans was like comparing apples to apples, think again! Try comparing apples to vegemite…no two home loans are created the same, which is great because it means that with a little research, you should be able to find a home loan tailored to your needs.
So, you’re ready to compare a few home loans – here are some things to think about as you go.
Home Loan Type
If you’re buying a property to live in, chances are you’ll be looking at a principal and interest loan. This means that repayments are calculated to repay the principal loan (the money taken out to purchase the property) as well as accruing interest. Principal and interest loans are calculated over a 25 to 30 year period and repayments are the minimum amount required to repay the whole debt (including interest) within that time period.
Interest-only loans may be suitable if you are purchasing property as an investment. Interest-only loans calculate repayments on accruing interest only, for a set period (up to five years), allowing investors to outlay a minimum amount on their investment property repayments. The downside of an interest-only loan is that you will not be paying off any of the principal loan, which means that you may not be building equity in your property through repayments.
Home Loan Rate
Your home loan rate is one of the most significant factors you should consider when taking out a home loan. The lower the interest rate, the less interest you will be paying on your principal loan, which will make your repayments lower. Interest rates will vary by home loan product and lender, so make sure you thoroughly research each rate. Interest rates are raised and lowered depending on market conditions, so they are generally subject to fluctuation. The most common rate type is a variable interest rate.
On a home loan with a variable interest rate, your interest rate may go up or down which means that your repayments will also change periodically. This is great when the rates go down but may put pressure on the budget when rates go up.
A fixed rate loan is one where the rate doesn’t fluctuate for a set period of time. Fixed rates tend to be slightly higher than the standard variable interest rate. Although having a fixed rate protects you if rates go up, if rates drop your rate will stay the same, meaning that any savings associated with a rate decrease will not be passed on to you. Apart from a higher rate, there may be other costs associated with fixing your interest rate, which we will talk about soon.
You may consider a split rate, which means that you fix a portion of your loan and you allow the other portion of your loan to sit on a variable rate.
There may be costs associated with your home loan that you may not be aware of.
Establishment fees are a one off fee, sometimes charged by lenders, to set up your loan. Establishment fees may cost hundreds of dollars although some lenders waive this fee as a ‘bonus.’ Be careful though, as sometimes your interest rate may be marginally higher to compensate.
Stamp duty is a tax levied on a state by state basis that enables you to purchase property in that state. Stamp duty rates may vary by state and you can check how much stamp duty you are liable for using this nifty calculator.
Early exit fees, redraw fees and extra payment fees may be incurred depending on your home loan. Early exit fees may apply if you sell your property before the end of your loan term or pay out your loan in a shorter time frame than expected. Extra payment fees (especially on fixed rate loans) may be charged if you make extra payments onto your home loan. If you’ve taken out a home loan with redraw facilities, you may be charged a fee each time you access your redraw facility. Please make sure you check the fine print of each home loan policy before making an executive decision.
Home loans are usually marketed as packages which include a variety of extra benefits. These benefits could include offset accounts, redraw facilities or lines of credit. Investigate which products may suit your needs the best to ensure you select the most suitable home loan package.
Buying a property is a significant financial, and sometimes, emotional investment. Take the time to compare home loan providers to find the perfect home loan to match your perfect property.