Which home loan is right for you? How can you tell when there are so many different lenders, loan types and features available? How do I compare home loans?
It can be confusing, particularly if you are a first-time buyer. Fortunately, we’re here to help explain things – it’s a huge part of our purpose as a mortgage broker, but so you’re well informed, let’s dive in.
Interest rates versus comparison rates
Interest rates are one of the factors that determine the cost of your mortgage and repayments. Even a small difference in interest rates can have a huge impact on how much interest you’ll pay over the course of the loan.
However, rather than just going with the lowest interest rate, it’s important to consider the comparison rate when you compare home loans.
The comparison rate is an indication of the true cost of a loan once the interest rate and fees are included. It’s usually expressed as a percentage, making it easier for you to compare the real cost of different loan products.
Principal and interest
With a principal and interest loan, you’ll be paying off both the principal (the amount you borrowed) and the interest.
People buying their own home usually opt for this type of loan, as it helps you pay down your mortgage until you eventually own the property.
An interest-only loan allows you to pay the interest you owe on the loan for a fixed period – usually one to five years.
At the end of the fixed period, the loan usually reverts to a principal and interest loan. Some people choose to refinance to another interest-only period at that point.
People buying an investment property often start off with an interest-only loan because the interest is tax deductable. However, interest rates on these types of loans are usually higher. And because you’re not paying down the principal during the fixed period, you will likely end up paying more interest over the term of the loan.
Variable home loan
With a variable home loan, your interest rate will fluctuate. If rates go down, your repayments will decrease, but if they go up, so too may your repayments.
One positive is that often with these types of loans you can make extra repayments, thereby saving on interest and potentially paying off your loan sooner.
Fixed home loan
A fixed rate loan is where you lock in your interest rate for a period (usually one to five years). The key benefit is that you’ll know exactly how much your repayments will be and can budget accordingly.
However, there may be restrictions on maying extra repayments and if you want to end the fixed rate period early (if you sell, for example), you may be up for exit fees.
Split home loan
Want the best of both worlds? With a split loan, you can fix a portion of your loan and keep the rest variable.
This option allows you to budget for the fixed portion and lock in a competitive interest rate, while enjoying any interest rate drops on the variable component and being able to make extra repayments.
There are all sorts of loan features that can potentially save you money in interest and shave time off your loan term.
An offset account, for example, allows you to offset any savings in a transaction account against the balance of your home loan. Say you owe $300,000 and there’s $50,000 in your offset, you’ll only pay interest on $250,000.
A redraw facility gives you the flexibility to make extra repayments on your home loan and potentially save on interest, but still gives you access to the funds.
Deciding what’s right for you
The bottom line is there’s no one-size-fits all loan for everyone. The right home loan for you depends on your specific financial circumstances and goals. As your mortgage broker, it’s our job (by law), to compare home loans and present you with the options that suit you best – banks don’t have to do this, they can simply sell you what they’ll profit most from.
We go through your situation in detail with you to build a story of what the ideal scenario for you is before finding and recommending any kind of mortgage. Speak with one our lending specialists today to start the conversation. Call 1300 469 840 or send us an email, you won’t regret it.