The Australian home loan market is saturated with lenders and products, which makes it very important for you to compare the various options that are out there.
Comparing home loans is not always the easiest task to accomplish. There are a few reasons why.
Some lenders may offer the same products as one another, but will offer them under different circumstances. Certain borrowers might find it easier to get a loan from a specific lender, even if that loan has an almost identical feature set as a loan offered at another lender. An example of this is the loan to value ratio, or LVR offered by a lender. You may have to put down a higher deposit upfront in order to get a loan, even if that loan has similar features to a loan offered by another lender who requires a smaller down payment.
Some lenders may also have unique features built into their loans that cannot be found with other providers. Things such as specific internet and mobile banking options, as well as unique customer service offerings can set a lender apart from the rest of the market. It can be hard to weigh unique features offered by one lender against the unique features offered by another.
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How you can compare loans from different banks
One of the biggest tools you have at your disposal when comparing home loans is the key facts sheet that can be found on most loan product pages or by contacting a lender and requesting it. Key facts sheets are information documents that lenders are required by law to provide to potential borrowers.
Here are two key facts sheets to serve as examples. These sheets were created on the Newcastle Permanent Building Society website. Both are variable rate loans of $150,000 over the course of 20 years. Let's run through some of the major pieces of information outlined in these sheets to show some of the major things you should take note of.
- The top section is the 'What have you told us' portion of the facts sheet. This box details the parameters of the loan you are looking for and have input into the form. The specific name of the loan product is in this section.
- The 'How does this loan compare?' section details the repayment methods and frequency allowed, as well as the interest rate and the comparison rate. These are important details in your decision process. The comparison rate is the interest rate of the home loan with fees factored into it. Therefore, the comparison rate is oftentimes a more important figure to look at when comparing two loans. Bear in mind that the comparison rate doesn't take into account your personal circumstances so be sure to take it with a grain of salt.
- The next section is the 'Estimated cost of this home loan' . This section outlines exactly how much this loan will cost you to pay back. What makes this portion of the facts sheet very useful is the ratio of money paid back to the amount of money borrowed that is outlined. In our hypothetical examples, the Real Options Rate Home Loan will end up costing you $1.66 in repayments for every $1 you borrow, while the Real Deal Variable Rate Home Loan will cost you $1.60 for every dollar you borrow. This section also details the various fees associated with the loan as well as the cost of repayments per month and per year.
You will also be told how much your repayments would increase by should your loan interest rate increase by 1%. This is handy for borrowers who are looking at variable rate loans, as including interest rate increases in your budget is a smart idea. Even if you find yourself able to afford payments at the advertised rate, you may find yourself underwater should the rate rise.
- The 'How can I repay my loan faster?' section will let you know if the loan comes with the ability to make extra repayments and calculates how quickly you will pay off the loan if you make an extra $200 in payments each month.
The second page of the key facts sheet is a generic outline of various features you may wish to include with your loan, as well as the lender's website and some information about the National Consumer Credit Protection Act of 2009.
What to compare with your home loan
Even if lenders are offering very different loan options, you can still compare them successfully. Besides the interest rate and type of rate, consider the fees associated with a loan. Application fees, annual fees and monthly fees are all things you should look out for. Fees can add up and taking into account the comparison rate of a loan can be helpful when deciding between different loans.
The feature set of a loan is another important aspect of a loan that is vital to the comparison process. Even if a loan's comparison rate does not stack up favourably you should not always discount it immediately. Take a look at features such as offset accounts, redraw facilities, portability, account linking, the ability to split the interest type between fixed and variable, the repayment structure, if extra repayments are allowed, access to equity and more.
Comparison example - fixed rate loans
Here we'll compare two different home loans in the same category—fixed loans. One loan is the ANZ Fixed Rate Home Loan and the other is the Commonwealth Bank Fixed Rate Home Loan.
Here's a comparison of two similar home loans from two different banks. This is using information found on both bank's websites. As you can see we've gone through and highlighted differences between the two in both features and jargon.
Fixed rate term
Can fix for periods of: 1 - 5 years, 7 years and 10 years
Can fix for periods of: 1-5 years, 7 years, 10 years or 15 years
Called a 'loan approval fee' and costs $600
Called an 'up-front establishment fee' and costs $600
Called a 'loan administration fee' and costs $10 per month
Called a 'monthly loan service fee' and costs $8 a month
Yes, 'Breakfree Package', discounts fixed interest rate by 0.15%p.a. and comes with fee discounts, costs $375 per year
Yes, 'Wealth Package' comes with a 0.15%p.a. discount on fixed rates and fee discounts for an annual fee of $375
Yes, you can pay interest only for up to 10 years
Yes, you can pay interest only for 1 - 15 years if the loan is an investment, or 1 - 10 years if the loan is for a home
Additional repayment options?
Yes, you can make up to a maximum of $5,000 or 5% of the loan amount extra per year (whichever is smaller).
Yes, you can make up to a maximum of $10,000 per year.
90% for new customers and 95% for eligible customers
Maximum LVR of 95%.
Yes, called a 'Lock rate fee' and costs $750
Yes, costs $750 and only available for 1 - 5 year periods
Yes, three months
Yes, six months
Yes, a 100% offset account is offered for one year terms only
Yes, a partial offset account is offered
Interest in advance?
Yes, comes with a 0.20%p.a. discount on investment home loans of 1 - 5 year terms.
|Learn more about ANZ fixed rate loans||Learn more about Commonwealth Bank Fixed Rate|
Those comparing these two loans would also want to know what the interest rates and comparison rates for both of these loans would be both during the fixed term and also if the loan reverted to the standard variable rate after the fixed term ends.
The features offered with a loan can be the make or break factor in determining the loan's viability. You need to ask yourself what you are looking for in a loan:
Are you a first time home buyer in need of some stability in the borrowing process?
Learn more about comparing first home buyer home loans: Here
Are you going to build your home and therefore need a line of credit home loan or a loan which offers drawdown payments?
Learn more about line of credit home loans: Here
Do you want to access the equity in your home?
Learn more about what you can use a line of credit home loan for: Here
Do you place a low fee structure and generous comparison rate at the top of your home loan wish list?
Consider comparing low rate home loans: Here
These are some of the questions you should ask yourself when comparing home loans. Oftentimes the best home loan for you will depend on your specific financial needs and desires.