Whether you're buying your first home or refinancing, make sure you steer clear of these common home loan pitfalls.
The home loan process can be a bit overwhelming. There are so many options in the market and so many lenders competing for your attention that getting a better deal on your home loan can end up in the "too hard" basket. But putting in a bit of effort can save you thousands in the long run.
If you're in the market for a home loan, whether it be for your first home or to refinance for a better deal, there are plenty of features to look for. There are also some common traps to avoid. Here are five of the most common home loan mistakes borrowers make.
1. Not comparing your options
If you already have a home loan, it can be tempting to set and forget, but it's a huge mistake to take a casual attitude towards your home loan. The Australian mortgage market is extremely dynamic and what was a good deal a few months ago might not be such a good deal now.
It's important to take stock of your home loan every six months or so. Do a health check to see how the rate you have compares to other offers in the market. If you find rates have moved substantially lower since you first took out your home loan, it could be time to refinance.
Likewise, if you're searching for your first home loan, it pays to compare your options. You may be tempted to stick with your main financial institution for ease and convenience, but that bit of convenience could cost you dearly in the long run.
Compare home loan options and see whether or not the deal on offer from your current financial institution is competitive or whether you need to look further afield. There are a number of challenger brands and online-only home loan providers that can offer rates far below what you could expect by walking into a bank branch. It's well worth your time to give them a look.
2. Not asking for a better deal
If you have a home loan already and find that there are better rates out there, your first order of business should be asking for a better deal. Don't be afraid to call your lender and ask them for a rate cut.
Lenders want to keep your business. In general, it's far more profitable for a lender to retain its current customers than to onboard new customers. Whether or not you realise it, your current lender is highly motivated to maintain its relationship with you.
Lenders have entire teams devoted to customer retention. If you call and tell them you've found a better home loan rate somewhere else and are thinking of jumping ship, you'll likely be transferred to the retention team who will work with you to offer you a better rate and keep your business.
There is one caveat to asking your lender for a better rate: you need to be willing to follow through on your threat to leave. If you find more competitive rates in the market and your lender is unwilling to match, it's time to refinance.
3. Not checking the comparison rate
Most people pay attention to the advertised interest rate when they're comparing home loan products. It makes sense. The interest rate dictates how much you'll be paying over the life of your home loan, but the advertised interest rate doesn't tell the full story.
Pay close attention to the comparison rate when you're researching home loan products. The comparison rate adds up the fees associated with a home loan, along with the headline interest rate, and expresses this figure as a percentage. You'll commonly find that a home loan's comparison rate is higher than its advertised, or headline, interest rate. How much higher it is will give you an indication of whether or not a home loan is the good deal it appears to be.
Some home loans come with ongoing fees. If these fees are significant enough, they can seriously eat into the value you're getting from a low interest rate. If a home loan has high fees, you should be able to see a discrepancy between the headline interest rate and the comparison rate.
Likewise, many home loans have what's known as a revert rate. This means that a home loan is offered at a certain rate for a certain period of time and then reverts to a different, usually higher rate. Fixed rate home loans will have revert rates, as will introductory or discounted variable rate home loans.
If a loan has a sharp headline interest rate coupled with a much higher comparison rate, it could be because of a high revert rate.
Paying attention to the comparison rate can help you separate home loans that are legitimately good value from those that are simply too good to be true.
4. Not paying attention to features
The interest rate might be the most visible detail of a home loan, but it's far from the only factor that should influence your decision.
Home loans often offer features that can help you manage your mortgage more easily, take charge of your debt and even pay off your home loan years ahead of schedule. Features like these can save you tens of thousands of dollars in interest over the life of your loan.
For instance, an offset account can shave years off your mortgage. Offset accounts are linked transaction accounts that reduce the amount you pay in interest. They work by offsetting the amount on which interest is calculated by the amount of funds in the account. For instance, if you have a $750,000 home loan with $50,000 in an offset account, you'll only be charged interest on $700,000. Your repayments will remain the same but a greater proportion will go toward paying down the principal of your loan.
Redraw facilities are another helpful feature offered by many home loans. A redraw facility allows you to access any extra funds you've paid toward your home loan; if you've made extra repayments throughout the year and find yourself in need of money, you can withdraw funds from your redraw account. However, be aware that some loans have a minimum redraw amount or charge for withdrawals.
A split facility can also give you more control over your home loan. Split facilities allow you to split your home loan into multiple accounts, taking advantage of multiple products. You could choose to have a portion of your home loan on a fixed rate and a portion on a variable rate. Or you could choose to split your loan between a basic, no-frills product and another home loan product that offers a variety of features.
While some home loan features come with ongoing fees, a feature that allows you to save on interest or have more control over your home loan can be well worth it. Take some time to think about the features that might be helpful for you and help you reach your financial goals, and look for home loans that offer them.
5. Not staying within your means
With Australian property prices still sky high, it can be tempting to borrow to the absolute maximum. But just because a lender will extend you a certain amount of credit doesn't mean it's wise to accept it.
You need to budget wisely when you take out a home loan. Crunch the numbers to make sure you can afford your monthly repayments. You can use the calculator below to see what your repayments would be for different borrowing amounts and terms.
You also need to ensure you can continue paying your home loan should circumstances change in the future. In general, you'll want to give yourself a 2% interest rate buffer. In other words, assuming rates rise by 2% in the future, you'll want to make sure you're still capable of meeting your repayments.
A home loan is a big commitment. It's likely to be the biggest financial decision you ever make. Erring on the side of caution will help save you from your home loan also being the biggest financial mistake you ever make.