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Be prepared: Top home loan tips, plus traps to avoid

6 min read
13 Jan 2020

The future is looking bright for potential homeowners, with the housing market in Australia showing positive signs of growth. With the national auction clearance rates averaging almost 70%, record-low mortgage rates and changes in lenders’ assessment rates, many believe conditions are ripe for prospective home buyers – both new and experienced.[1], [2], [3]

Alarmingly, many mortgage holders aren’t clued up on their current loan rates and could be missing out on savings or features that may benefit them. Over half (57%) don’t know the interest rate they currently pay on their home loan.[4]

When asked, a staggering 54% admitted to not understanding split interest rates, while one in five (21%) said they didn’t know how variable interest rates worked. A quarter (26%) either said they had no, or very little understanding of variable interest rates.

We provide tips on how to:

  1. demystify the home loan process; and
  2. help avoid some costly property purchasing traps for both first home buyers and those already on the property ladder.

Young couple meeting with a home loan lender.

Work out the length of your loan

With the average mortgage size for first home buyers exceeding $342,800 in 2018,[5] it’s important to accurately map out an achievable timeframe and forecast manageable repayments with your lender. Discuss the advantages of breaking down your home loan into weekly, fortnightly or monthly repayments and how much interest you’ll be paying over the life of your loan.

Paying fortnightly would allow you to make an extra month’s repayment per year. For example, if you made repayments of $1,000 every fortnight of the year, you would pay back $26,000 in one year. If you made repayments of $2,000 every month of the year, then you would only pay back $24,000 in one year. That’s $2,000 more you’ve paid off your home loan each year!

Compare key facts sheets

A great way to compare home loans is to ask for a key facts sheet from different lenders. The key facts sheet will give you the information you need, so you can directly compare features, interest rates and fees. This will outline the total amount you’ll need to pay back over the life of the loan, repayment amounts and fees.

These fact sheets also provide a personalised comparison rate to help you compare the total cost of a loan against other loans. Lenders are obliged to provide a key facts sheet for your home loan if you ask for one, unless you’re considering an interest-only or line of credit home loan.

Consider an offset account

A home loan feature that could be worth considering is an offset account, which could save you money by limiting the interest you pay on your home loan. If you choose to link your eligible home loan account to your savings account, the balance of the savings account will be seen (but not drawn upon) as money you’ve paid towards your home loan.

Consequently, you’ll only be charged interest on the ‘remaining’ balance of your loan. For example, if you had a $300,000 home loan and $25,000 sitting in your savings account, you will only be charged interest against $275,000.

Get your head around the different loan types and rates

Choosing a home loan should be based on your circumstances and financial goals. When approaching your broker or lender, discuss the different types of loans, features and rates that are available for your home loan and what each one involves. Ask for clarity around how a rate decrease or increase could impact you, and how you can track these changes month on month.

Some of the rates you will come across include:

Variable

A variable rate is the most common type of loan. This interest rate can fluctuate over time, with increases or decreases set by your bank or financial institution. Lenders often look at cash rate changes by the Reserve Bank of Australia to determine if they will shift variable loan rates. It’s especially important to monitor variable rate changes to check for any adjustments to your repayments on your home loan;

Fixed

The interest rate on your loan will remain unchanged for the fixed period, typically between one and five years, which provides you with some certainty for your repayments during that period. Typically, your loan will revert to the variable rate after the fixed-rate period. Keep in mind that penalties may apply if you break a fixed-rate loan;

Split rate

A split rate is where part of the loan is variable, and the other part is fixed. You can enjoy the benefits of both fixed and variable rate options; and

Interest only

Instead of paying off both the principal and interest in your repayments, you will only pay off the interest on your loan for a certain period (approximately one to five years). Inevitably, your repayments will be lower for the interest-only period, than if you were also paying off the principal.

However, during the interest-only period, the principal amount (the amount you initially borrowed) will not reduce unless you choose to make additional repayments. It’s important to understand that while paying interest only may be a cheaper alternative and more budget-friendly, in the short term, you may pay more interest overall as the balance is not reducing and your repayments are likely to be higher at the end of the interest-only term.

Family unpacking truck in front of their new home.

Introductory and comparison rates

Introductory rates can draw a lot of people into taking out a loan. These are the rates lenders offer for a certain period (the ‘honeymoon period’) and are typically lower than standard rates. However, it’s important to understand how long these great rates will last, and what your interest rate will be once your loan reverts to a standard rate.

A comparison rate will help you compare multiple lender’s home loans side by side, using a single interest rate. This interest rate includes any fees that might apply to that loan, such as application fees and any ongoing fees. Overall, the comparison rate offers a true picture of just how much the loan will cost you.

Lenders should also supply you with a copy of a comparison rate schedule, which will have this comparison rate included.

While buying a property is exciting and often overwhelming, it’s a good idea to cover the basics and familiarise yourself with different loan types. You should also understand how changes in interest rates can affect how much you need to repay for the lifetime of your loan.

We offer an obligation-free service; so, we encourage you to jump online or request a call from an expert to see which home loan offers are available from our panel of over 45 lenders. Feel free to ask as many questions as you have. We’re here to help!

Sources

[1] CoreLogic Auction Results Wednesday 18 December 2019 https://www.corelogic.com.au/auction-results

[2] Reserve Bank of Australia Media Release Statement by Philip Lowe, Governor: Monetary Policy Decision media release December 2019: https://www.rba.gov.au/media-releases/2019/mr-19-33.html

[3] APRA finalises amendments to guidance on residential mortgage lending media release July 2019: https://www.apra.gov.au/news-and-publications/apra-finalises-amendments-to-guidance-on-residential-mortgage-lending

[4] Pure Profile survey commissioned by Compare the Market, April 2018

[5] ABS – Housing Finance Australia April 2018: http://www.abs.gov.au/AUSSTATS/[email protected]/0e5fa1cc95cd093c4a2568110007852b/d672cf4ebe195f15ca256e910077d9c2!OpenDocument

 

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Written by Claire Rosenberg

Claire has a penchant for a catchy headline and believes almost everything can be improved with a pun. First in line at any buffet table, Claire’s strategy to her meals mirrors her work ethic: planning is everything. She’s a mid century modern enthusiast, and will often be found trawling for retro treasures or perfecting her tiki cocktail making skills.

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