Look beyond a low rate and you could save thousands on your home loan.
Selecting a low rate home loan does not always give you the best value. Other elements, such as upfront and ongoing fees, and loan features such as offset accounts and additional repayment options, are just as important when selecting a home loan. Remember to look at the full picture and not just take a narrow view.When many people compare home loans, the only thing they look at is the interest rate. Although the interest rate is a crucial factor, it’s only one of the elements you should be looking at.
How important are home loan rates?
Interest rates have a huge impact on your home loan, as they determine your repayments. The lower the interest rate, the lower your monthly repayments.
But this is only looking at one side of the picture. Other associated fees and a lack of features in your home loan can hit just as hard as higher repayments and may end up costing you more in the end.
What else should you consider when comparing home loans?
There are many other features to take into account when doing a home loan comparison. These key features should be looked into alongside the rates to determine which home loan gives you the best value.
One of the main features you should be comparing is if an offset account is available. Offset accounts are usually offered on full-featured home loans and they can help you save on interest and pay off your mortgage sooner. Offset accounts work by opening up a transaction account which is linked to your home loan. The funds you put into your transaction account are offset against your mortgage and minimises the interest you have to pay. For example, if you have a remaining home loan balance of $200,000 and you have $20,000 in your transaction account, you will only have to pay interest on $180,000. Offset accounts can either be 100% offset or partially offset. They are effective at saving you money in interest repayments and in some cases, can be more effective than a lower interest rate.
Comparison of home loans
Additional repayment options
You should also consider if the home loan allows you to make additional repayments and redraw these payments. Additional repayments involve you making extra repayments towards paying off your home loan when you can. Some home loans don’t permit this, others will allow it but will charge you a fee, and some allow you to make unlimited additional repayments free of charge. If you are someone who has the capacity to make extra repayments from time to time and wants to pay off your loan sooner, it’s crucial that your lender allows extra repayments. Some basic low-rate home loans don’t allow this.
The redraw facility allows you to redraw repayments you have already made towards your home loan when you need funds the most. This ensures your funds aren’t locked up in repayments and you can access them when you need to. Both of these two features are valuable in a home loan and are important to consider before selecting a low-rate loan. Most variable rate home loans will allow you to make additional repayments, unlike fixed rate home loans.
To compare some fixed rate home loans which allow you to make additional repayments, look below.
Comparison of fixed rate home loans which allow additional repayments
Interest rate types
Home loans typically come with a fixed or variable rate. Depending on your current situation and your preference, some people are more suited to one or the other. Fixed rate loans lock in an interest rate for a period of one to five years. During the period your loan is fixed, you won’t be affected by interest rate fluctuations and your rate and your repayments will remain the same. Fixed rate loans are great for budgeting; however, they typically lack flexibility and features.
Variable rate home loans are more flexible than fixed rate home loans. The interest rate on these loans fluctuates as market rates change. They have more features and typically have a lower rate than fixed loans, but if the interest rate rises you aren’t protected against fluctuations.
Negotiate on your existing loan before refinancing
If you are considering refinancing, you should first ask your current lender if you are receiving the best rate. Refinancing can be very expensive and switching to a lower-rate loan can sometimes end up costing you more if the fees are high. Lenders will often entice you to stay with discounts and other incentives, so it’s worth asking the question.
Low interest rates can keep your repayments low but they shouldn’t be the only consideration when comparing home loans. Other aspects such as fees and features are just as important and can lead you to a greater value home loan. Make sure you compare all the aspects of a home loan first before deciding which one is right for you.