As the lending industry has evolved, borrowers have had to deal with more complexity. Lenders now offer all sorts of home loans, many of which come with additional features bolted on. You also need to choose between different loan types. Options range from variable and fixed-rate loans to introductory and interest-only loans.
Borrowers need to understand what all of these terms mean so they can find the loans that best suit them.
The Things You Should Consider
Many new borrowers make the mistake of only looking at the interest rate when applying for a home loan. While this rate is obviously important, there’s much more to consider when searching for a loan.
For example, loans with low interest rates might have high fees attached. Conversely, you may pay more interest for a loan with a lot of added features. This makes finding the right loan a balancing act. You need to set priorities and align your goals with the loan features.
Your loan must meet your personal needs, so figure out the structure before you start looking at lenders and rates.
Furthermore, your deposit will help to determine the type of home loan lenders offer you. You may pay Lender’s Mortgage Insurance (LMI) if your deposit is less than 20% of the home’s value. Some lenders waive LMI, but you may have to pay steeper fees or a higher interest rate in return.
Use your deposit as your starting point, then sift through the available loans to find a structure that suits you.
The Key Features
We mentioned loan features before, so let’s expand on that here. You must remember that not all home loan features will meet your needs. For example, there’s no point in having an offset account if you don’t have enough money saved to take full advantage of it.
- Having said that, there are some loan features that most people can take advantage of. They include:The option to make early repayments
- The option to make repayments through multiple channels. For example, many loans allow you to repay via the internet, telephone or using an ATM
- Loan portability, allowing you to move your loan if you move house
- The option to re-fix your interest rate so you can take advantage of the national interest rate.
Ultimately, the key features of the loan will depend on your circumstances. Speak to a home loan consultant to find out about the features that could benefit you.
Choosing a Lender
An attractive loan package may mean very little if you have an unresponsive lender. The service you receive must match the loan features.
Research any lender you consider before applying for a loan. Listen to people who’ve worked with the lender before and check the lender’s website to find out more.
You need to find a lender that communicates well after settlement and during the application period. For example, it’s worth finding out if the lender has customer service personnel in branches, or if you have to contact a call centre when you need help.
The best way to deal with the complexities of a home loan is to make it as transparent as possible. Learn about the loan and everything attached to it, rather than just looking at the interest rate.
The good news is that lenders must answer any questions you have about the loan. In addition to the fees that you know you have to pay, ask about any that you’ll probably have to pay. For example, many people refinance their loans at some point, which can involve multiple fees. Ask about all these fees, rather than focusing on one. Some lenders limit their explanations if you only ask about one term.
A few lenders waive their application fees to tempt customers. While this may seem attractive at first, ask about any hidden fees that might cover the cost that waiving the application fee places on the lender.
Despite this, you can find loans with good rates and low fees that also offer the flexibility you need later on. You just need to ask the right questions or work with a home loan consultant who can ask them for you.
Using Comparison Rates
The government introduced comparison rates to offer consumers a more accurate idea of the cost of their home loans. The comparison rate pulls the loan interest rate and fees together, creating a percentage figure that’s often higher than the interest rate alone.
This makes them useful for understanding how much a loan will cost. For example, you may find that a loan with a high rate actually costs less than one with a low rate, once you take the other fees into account.
Unfortunately, comparison rates are not perfect. The calculation used for comparison rates is a set figure and loan term, which is unlikely to match your particular scenario.
This means the comparison rate alone isn’t enough to tell you what you’re getting. You need to understand every aspect of the loan’s structure.
Can a Mortgage Broker Help?
Mortgage brokers can help you to sift through the information if you’re unsure about what you’re looking at. Brokers also have access to many loan products and can offer specific advice for your personal situation.
However, you must choose the right broker. Be wary of any brokers who work with a small number of loan companies, as this means they don’t offer the variety you need to find the best home loan.
Also, check that the broker has registered with the Australian Securities and Investments Commission.
What to do next
Now you understand what to look for in a home loan, you’re almost ready to take the next step. Before you do, we recommend you do the following:
- Find out how we helped a first-time buyer to find the perfect home loan
- Use our calculator to find out how much you can borrow
- Talk to one of our mortgage brokers.
This information is general in nature and you should always seek professional advice when making financial decisions.