Shopping for a home loan in 2021: 5 questions to ask

Current interest rate settings have fast-tracked property ownership dreams across Australia, with home loan approvals currently at all-time highs and first home buyers in particular flocking to the market in droves.

But before you take out a home loan, there are a few things you’ll need to be clear about. Below we’ve compiled some of the main questions you should ask yourself to help you in your search.

Fixed or variable?

When selecting a home loan, you can choose between a fixed or variable interest rate. A fixed rate will stay the same for the duration of the term, meaning you won’t have to worry about any rate hikes. Terms usually range from one to five years, though a small number of lenders offer ten-year options (with exorbitantly high interest rates).

Variable rates, on the other hand, are subject to change depending on the cash rate and the whims of your lender. They also tend to offer more in the way of features, so if you’re after a home loan with all the bells and whistles, here’s where you should be looking.

While variable rates were once the cheaper of the two, recent efforts by the Reserve Bank have helped make fixed rates the more attractive option. At the time of writing, the average 2-year fixed rate sits at 2.34% p.a., while the average variable rate is 3.30% p.a.

What about features?

Some home loans offer only the essentials, while others come with a range of handy features to help you save on interest. Here are the main home loan features to look out for:

Offset account: money held in an offset account will offset the balance of your home loan. That means if you have a $500,000 loan and $20,000 in an offset account, you’ll only be charged interest on $480,000.

Extra repayments: many home loans will allow you to make extra repayments, which can be a good way to reduce the amount of interest paid over the life of the loan. Some conditions, such as annual limits, might apply.

Redraw facility: a redraw facility allows you to retrieve any extra repayments you’ve made to use for other purposes. This can be much cheaper than using your credit card or taking out a personal loan, since the interest charged on home loans tends to be much lower.

Repayment holiday: if your circumstances change and you need a break from your mortgage, you might be able to request a repayment holiday. This will pause your repayments for a set period, allowing you to focus on other obligations.

Home loan top-up: this allows you to borrow additional funds against your current home loan. Just keep in mind that in taking on more debt, your monthly repayment amount will increase, as will the total amount of interest you’ll pay.

What is a comparison rate?

When picking out home loans, you want to compare like for like. Advertised interest rates can offer a handy starting point but they don’t take into account associated costs, which can vary considerably between loans.

Comparison rates get around this problem by combining the interest rate with all other applicable fees (e.g. upfront fees, settlement fees, and any ongoing charges), giving you a more accurate indication of how much a loan will cost you.

That said, there will be a few things the comparison rate doesn’t cover, including government charges (such as stamp duty), the cost of opt-in features, conveyancing fees and break costs. Any extra savings from things like fee waivers and bonus offers also won’t be taken into account.

Are there any fees?

The interest charged on your loan might be your main concern, but chances are it’s not the only cost involved. Depending on your lender and the home loan you sign up for, you might have to budget for the following:

• Application fee

• Valuation and legal fees

• Monthly or annual service fees

• Late payment fees

• Discharge fee

If your loan to value ratio is above 80% (that is, you have less than 20% of a property’s value saved up for a deposit) you’ll also be required to purchase lender’s mortgage insurance (LMI). This protects your lender in case you default on your loan.

How do I get approved for a home loan?

First things first, you’ll need to make sure you have all the necessary documents in place. This includes identification, your birth or citizenship certificate, Medicare card, and an ATO assessment notice from the last 12 months.

Beyond that, lenders will want to see evidence of income and spending habits so they can calculate how much you can reasonably afford to pay. To help with this, make sure you have your payslips and three months of bank statements at the ready.

Finally, lenders will be looking at your credit score, so try to pay off any existing debts and avoid applying for any new credit products in the meantime.

For more tips, check out our guide to boosting your chances of home loan approval. And for an idea of the interest rates currently available, visit our home loans comparison page, or browse the selection below.