Don’t be afraid! First time buyers have to go into the process armed with the knowledge, in terms of repayments and features, of what will suit their circumstances.
Choosing a home loan has become more and more difficult as the lending industry becomes increasingly competitive and complex.
Home loans are available in many different variations. There are introductory, fixed and variable rates offered by hundreds of lenders, with interest only or principal and interest (P&I) repayment methods.
The fees and features offered by each lender differ and there are a multitude of variations available to suit your needs.
They should also know how to compare loans and where to look to get an overview of the market.
The golden rules:
- consider the whole package offered and not to look at one aspect like the interest rate – ask for the comparison rate
- if a loan has a very low interest rate, the chances are the fee structure is high. Watch out for hidden fees!
- if there are lots of features attached to the loan, you’ll usually pay for them via higher interest rates or more fees
- take control and get educated
So what’s a comparison rate?
A comparison rate is a tool to help consumers identify the true cost of a loan. It factors in the interest rate, fees and charges and displays a single percentage rate that can be used to compare various loans from different lenders.
From 1 July 2003, the Australian Government made it mandatory to display a comparison rate for any advertisement of a credit rate – including home loans.
Factors effecting comparison rates?
Comparison rates are calculated on a number of factors, including:
- loan amount
- term of the loan
- repayment frequency
- interest rate
- fees and charges (excluding government charges, such as stamp duty and mortgage registration fees)
What fees apply to the loan?
There may be a number of fees charged on different features of a home loan, including:
- application fees (also called establishment fee)
- property valuation fees
- ongoing fees such as annual fees
- late payment fee (also called default fee)
- early exit fee
- discharge fee (also called termination fees or settlement fees charged when you pay out your mortgage in full)
- break fees (if you switch loans during a fixed rate term)
- redraw fees
- account keeping fee for offset account (if you have an offset account attached to your loan)
- lender’s mortgage insurance (LMI) (if you only have a small deposit on your loan)
Does the loan have features important to you?
While rate and repayment amounts are important, you should also check out what features are on offer in a home loan that you might be considering. Some home loan features to look for include:
- an offset account
- a redraw facility
- ability to make extra repayments
- ability to make lump sum repayments
- ability to split the loan between fixed and variable
- ability to get home loan pre-approval
- the factor that will have by far the biggest impact on the overall cost of your loan is the interest rate – so ensure that you’re not paying an uncompetitive rate