Your home loan shopping checklist - building the best mortgage for you
Fellow property hunters, take a moment to think about the amount of time you spent choosing the right home or investment property. If you’re like most of us, the answer is probably “endless hours” on websites like realestate.com.au and Domain.
But do you set aside this amount of time when it comes to choosing a home loan? While it’s essential to do your due diligence when it comes to making such a big purchase as real estate, don’t underestimate the importance of choosing the right mortgage, as it could provide you with great flexibility or save you a considerable amount of coin in the long run.
So to help you do just that - find yourself the best possible home loan for you - we’ve compiled the ultimate mortgage shopping checklist:
1. Your home loan interest rate
First up, let’s talk about one of the most important aspects of taking out a mortgage - your interest rate. In the home loan world, there are three main types of rates to choose from...
Variable interest rate
The most popular type of home loan in Australia is a variable interest rate, which provides considerable flexibility compared to the fixed rate alternative, coming with features like a 100% offset account or line of credit facility. If you do go for this option you’ll need to be mindful that your rate could change at any time and should ensure you can fully manage any repayment increases. You can use our rate change calculator to see how much a rate hike would affect your repayments by.
Fixed interest rate
We all know home loan interest rates are low but for how long? With a fixed rate loan you can lock in your rate for a period of 1 to 5 years and protect yourself against any future rate movements in the market. The obvious benefit of choosing a fixed rate mortgage is your repayments will remain the same during the fixed rate period, which is often an attractive option for first time buyers or those on a tight budget. While you’ll generally have to forfeit those flexible features that come with a variable rate loan like an offset account, the good news is these days many fixed rate loans come with an extra repayments facility.
Split interest rate
Alternatively if you like the sound of both there’s another option - fixing a portion of your loan and leaving the remainder variable. So you’ll have repayment certainty on the fixed portion, and can take advantage of features like a partial offset account on the variable part. Here’s a quick example: Say homeowner Dave has a $500,000 mortgage and decides to split his loan with a 60:40 ratio, that will mean the fixed interest rate would apply to $300,000 of the loan amount, whilst the remaining $200,000 will be left variable.
2. Your home loan repayments
Whether you go for the security of a fixed interest rate or the flexibility of a variable, you’ll have the option of choosing either principal and interest or interest only repayments. What’s the difference you ask? Here’s a quick snapshot:
Principal and interest repayments
The more common repayment option is to choose paying down both the principal and the interest. This will mean you’re repaying the amount you have borrowed, as well as the interest charged by the lender and will pay off your loan sooner than someone that goes for the interest only loan option.
Interest only repayments
Are you an investor relying on capital gains or a first timer on a tight budget? Then going for the interest only repayments option could be a good choice for you. How it works is instead of paying down the principal of the loan (i.e the amount you have borrowed), you’ll only pay the interest for an agreed period of time, which will result in your repayments being lower. Interest only repayment terms can last anywhere from 1 to 7 years, so ensure you have the funds to start paying down the principal once the term is over.
3. Your home loan features
Now it’s time to decide what features will you put on your home loan shopping list that will help you pay off your loan sooner or provide you with the flexibility to do things like renovate down the track (keep in mind, if you selected a fixed interest rate above, some of the features below may not be available):
Extra repayments facility
This feature is a popular option if you’re looking to say good-riddance to your home loan sooner. The name is pretty self-explanatory, as you can top up your home loan with extra repayments. For instance, our extra repayments calculator shows a homeowner - with a $500k mortgage paid back over 25 years and a rate of 5% - that makes an additional payment of just $70 a month, would pay $19,603 less in interest and pay off their loan 1 year and 1 month sooner. For those that are going for a fixed rate loan, keep in mind some loans have caps on the amount you can repay.
If you do decide to put an extra repayments facility on your shopping list, then you may as well add a redraw facility too. This nifty feature means when the unexpected occurs like a high bill or new addition to the family, you’ll be able to dip into any additional payments you’ve made. When you compare home loan deals, make sure you check what the redraw fees are and if there are any caps on the amount you can take out.
The easiest way to describe an offset account is it’s just like your everyday bank account - you know the one your salary is debited into? When you open an offset account you’ll receive a debit card and will also be able to make bill payments online. The benefit of putting this feature on your home loan shopping list is the balance in your account will be offset daily against the home loan principal, meaning you’ll pay less interest. So if you have $50,000 in the account and you owe $600,000, you’ll only be charged interest on $550,000. As mentioned, home loans with an offset facility are only available if you go for the variable rate option or if you split a portion of your loan.
Another feature that could come in handy (especially down the track) is the option of a repayment holiday, which means you can take a break from making your ongoing repayments for an agreed period of time (usually up to 6 months). Keep in mind, there may be conditions attached like being ahead on your repayments, so consider checking what they are before signing up for a loan.
Line of credit facility
This feature is for those that already hold equity in a property and are looking to do things like renovate. A line of credit loan is just like an overdraft facility, allowing you to draw on funds when you please up to an agreed amount (which will be based on the amount of equity you have). The best part of this feature is you’ll only be charged interest on the amount you use but the downside is you’ll generally have to pay a higher interest rate and/or fees for having the service available to you.
4. Your provider
The last thing you should think about when it comes to your home loan checklist is the type of provider you’ll go for...
Apart from banking with a face you’re familiar with, big banks also come with the perk of having your own bank manager that will help you at each step of the home loan process. A major player may also be for you if you want to bundle your home loan with your other banking products like your credit card and savings account and in return you’ll get a lower rate and ongoing fees. But often, going for a larger provider means you may be missing out on some of the cheapest home loan deals in the market...
Are you looking for an alternative to banking with a major and like the thought of borrowing from a member owned institution. Well have we got the provider for you! Mutuals like Community First Credit Union and Greater Building Society are run entirely by their members, so rather than passing profits to shareholders, they pass them right back to you by offering generally lower rates and fees. Just keep in mind a small membership fee of around $10 may apply when you join as a member.
Online only provider
Another group of challengers to the big banks - where you’ll usually find some of the best home loan deals - are online only lenders like UBank, ING Direct, iMortgage and Homestar. Because they are run entirely online (and don’t have the cost of paying bank staff) they can afford to offer lower rates and fees to their customers. Just ensure you’ll be happy to forfeit the face to face contact of a bank manager if you go for this type of provider.
Think you have a good idea of what your perfect home loan looks like? Make Mozo.com.au’s home loan hub your next stop, home to over 480 mortgage packages that you can compare by rates, fees and features.