6 home loan red flags to watch out for

Comparing home loans can be tricky when you’re in the thick of it. After a while, many mortgages start to feel the same and the differences can be hard to spot. Which home loans offer the best value? Which lenders have your best interest at heart? 

So to help simplify your comparison process, here are some immediate red flags to watch out for in a home loan.

Some home loans are designed to be bare-bones basic – and that’s okay! Not every borrower is looking for all the bells and whistles. However, if a home loan’s features still don’t inspire you, or don’t feel useful, then it’s a red flag. 

Some of the best features a home loan can have include:

• Offset accounts
• Free extra repayments
• Redraw facilities. 

All of these can help save on interest repayments long-term, which can help you pay down your home loan faster. Keep in mind these features are more common with variable interest rate home loans, rather than fixed ones. 

Some home loans offer special extras, such as Unloan’s unique interest rate discount. Look for features that are useful, valuable, and exciting – if you can visualise yourself using them, that’s a green flag.

Home loan jargon can be hard to understand, and some lenders overuse it to confuse borrowers. After all, a confused borrower is an easy borrower to fool. So if a lender isn’t writing the terms and conditions of a home loan in plain, clear language, it’s a red flag. 

As a rule of thumb, important disclaimers should be immediately obvious, not hidden at the bottom of the page. If you have to go hunting for the bad news, it might be bad news all around.

The headline interest rate is often the most eye-catching part of a home loan. A good interest rate is usually lower than the competition and comes attached to a loan with features to suit you, a lender you like, and the borrowing power you need. 

However, be wary of ‘honeymoon’ or introductory rates – they can mislead you by making a mortgage seem cheaper than it really is. Always look at the comparison rate, usually given beside the headline rate, as this gives you a more accurate picture of how much a home loan costs. 

If you’re comparing fixed rate home loans, always check the rollover interest rate, too, as this is what you’ll be paying when your fixed term expires.

Fees can seem like little annoyances next to the large costs of home loan deposits and stamp duty, but it’s vital to consider them. The main types of fees home loan lenders can charge include:

• Property valuation fees
• Settlement fees
• Application fees
• Account fees
• Monthly fees
• Annual fees
• Redraw fees
• Extra repayment fees
• Transaction fees
• Discharge fees

There is no such thing as a fee-free loan, no matter how much lenders may advertise their offers as such. Third-party fees may apply, and there may be dishonour fees or other hidden charges if you miss a repayment or break a fixed term early. 

However, there are plenty of low-fee loans to compare, usually with small or online mortgage lenders. Factor any fees a home loan has into your own affordability calculations, and make sure to speak to a financial adviser so you know your budget.

Different lenders will let you borrow different amounts of money for a home loan. For example, some may have eligibility requirements that let you buy in with a deposit smaller than 20%, or some may only let you borrow up to $3-5 million. 

Others simply have varying comfort levels when it comes to borrower risk, so your debt-to-income ratio might earn you different sums from different lenders. 

If you’ve checked with the lender’s borrowing calculator and find your borrowing capacity isn’t enough for the property you want, it could be a red flag for either the lender or you. Perhaps you need to look at cheaper properties or other kinds of home loans so you can safely meet serviceability requirements. 

After all, the last thing you want to do is take out a home loan you can’t afford to repay.

Ultimately, the goal is to finish paying off and discharge your mortgage. But if a lender slows down your progress to the finish line by charging outrageous discharge fees, hiking interest rates, or punishing you for making extra repayments, then consider your starting line littered with red flags. 

Lenders make money by charging you interest on the principal amount you borrow, so it makes sense why they would want to maximise their profits and fleece you for what you’re worth. The faster you pay down a home loan, after all, the less interest a lender earns. 

However, a good lender will put affordability first and reward you for paying off your mortgage, whether it’s consistently over your loan term or quickly with extra and/or fortnightly repayments. Remember, the mission is to own your home, not debt. Any lender that remembers this is an automatic green flag.

Compare low-interest rate home loans in the table below.