Top things to consider when choosing a home loan
According to the Australian Bureau of Statistics, Australia has one of the highest levels of home ownership in the world. However getting a foot in the property door isn’t always easy and choosing a home loan can often be a major headache. So before you rush into signing up with any old home loan, think about the type of loan that’s right for you.
Here’s an overview of the different home loan types and features to help you decide.
Which interest rate should I choose? Variable vs Fixed vs Split
Get more options with a variable rate home loan. As the name suggests, a variable rate home loan means the interest you pay can change at any time, depending on the RBA’s official cash rate and the state of the economy. While it may seem a bit risky if rates go up, a variable rate home loan traditionally has lower interest rates than a fixed rate home loan and offers more flexible features like extra repayments and a redraw facility.
Know your repayments with a fixed rate home loan. On the other hand, if you want to know your repayment schedule for the first few years while your budget is tight, consider a fixed rate home loan. Remember fixed rate home loans usually have less features than a variable rate home loan and higher break cost fees apply if you switch home loans or pay the loan out during the fixed rate period. At the end of the fixed rate period don’t just settle for the standard variable revert rate, make sure you compare the home loan market and switch if the new home loan rate isn’t competitive.
Enjoy the best of both worlds with a split. Split loans allow you to fix a portion of your home loan, so you get the certainty of fixed rates and the flexibility of variable rates. Split home loans generally provide access to extra features such as a redraw facility and an offset account (if your variable portion allows this).
What if I’m on a tight budget? Low deposit and longer term home loans
Get in early with a low deposit home loan. If you’re finding it difficult to save the advised 20% deposit, you can look for a low deposit home loan, as some lenders allow first home buyers to borrow up to 95% of the property’s value. However, you’ll have to pay lenders mortgage insurance (added to your mortgage) to protect the provider if you forfeit on your home loan.
Lower your repayments with a longer term loan. While the standard home loan is usually 25 years, some financial lenders allow first home buyers to extend their mortgage to 30 years. So if repayments are looking a bit steep you could consider a longer term loan which will reduce your regular repayments but increase the life of your loan and the interest you’ll need to pay.
How do I pay less on my home loan? Home loan fees and interest
Don't fall foul of home loan fees. Most home loans come with an application fee, that can reach as high as $1000. But the real sting comes in the form of ongoing service fees, which could cost you tens of thousands over the life of the loan. So unless you’re going to use most of the home loan features (extra repayments, offset account or redraw facility), you’re better off opting for a home loan with no ongoing fees and less features. Keep in mind, these days there are online only home loans and many of these have low application fees and no ongoing service fees. Compare online lenders on Mozo here.
Reduce your repayments with an offset account. You can reduce the amount of interest you pay by depositing your salary into an offset account attached to your home loan. Say you have a $400,000 home loan and an offset account with a $50,000 balance, you will only pay interest on $350,000. An offset account works just like a regular bank account and comes with a debit card for everyday purchases.
Make extra repayments to reduce the life of your loan. While you may be saving every cent to purchase your first home, you never know how your finances will sit in a few years (i.e work promotions). That’s why signing up with a home loan that allows you to make free extra or lump sum repayments is a wise idea, as you’ll reduce the term of your loan once you come into more money. Try Mozo’s extra repayments calculator to see the difference extra repayments could make.
Pay your repayments fortnightly rather than monthly. Another way to pay off your home loan sooner is by setting up fortnightly repayments, instead of the typical monthly repayment schedule, which will squeeze in an extra month of repayments each year. Say your monthly repayments are $3,000, over a year (12 months) you will pay off $36,000. But if you opt for the $1,500 fortnightly option, over a year (26 fortnights) you will pay $39,000. So by simply opting for the fortnightly repayment option you will be paying $3,000 more each year and will bring yourself that much closer to paying off your first home.
What features will help me in the future? Redraw, home loan top up and repayment holiday
Enjoy the flexibility of a redraw facility. A redraw facility allows you to access any extra repayments you have made, for things like weddings, babies or renovation. Most home loans let you redraw your funds for free but have a minimum redraw amount, usually around $250.
Fund your reno with a home loan top up. Once you have built up equity in your home loan, you could consider a home loan top up, where you borrow extra funds on your existing home loan to fund activities like renovating or redecorating (top up fees may apply).
Take a break with a repayment holiday. Tackling home loan repayments over a 25-30 year period is a big commitment, so there may come a time when you need a holiday from making repayments on your home loan for a short period of time such as when you have kids. Remember taking a repayment holiday will extend the life of your loan (unless you’ve made extra repayments to cover the time you have off) and mean you’ll pay more interest in the long run.
While adding extra features can make your home loan more expensive selecting a loan is a personal choice, so weigh up your options and decide what is best for you.