Home Buying Guide Step 4: Comparing finance options

home buying guide comparing finance check 4

In Section 4 of the Home Buying Guide, we outline the steps you need to take to get finance ready.

Once you’ve decided on the location and property for your purchase and you're serious about buying, you need to get your finances in order.

You may feel a sense of relief after locking in a location and property for your upcoming purchase, but there is still work to do before you get the keys to your property. Analysing your financial situation, knowing how much you can afford to borrow, and understanding the type of home loan that will suit your homeownership goals are just some of the things that need to be ticked off your list before you apply for a home loan.

How do home loans work?

For the vast majority of Australian borrowers, a home loan is required to bridge the gap between your available deposit and the property price. A home loan involves borrowing an approved amount of money from a lending institution and repaying the principal amount (and interest) over the loan term, which is normally 25- 30 years. Interest is typically calculated on the outstanding balance of your loan at the end of each business day. This amount is then multiplied by the interest rate and divided by 365 days (however this may vary depending on the lender).

In theory, it sounds simple. Take out a home loan and pay it back with interest over time. However, there are many features of home loan products that are worth researching and enquiring about to ensure that you get the right type of finance for you. In a competitive marketplace, there are many different home loan types and product features available, which is why it pays to learn how home loans function, how they are structured, and how different home loans can suit different types of borrowers. Being savvy about home loans will save you money and enable you to free yourself from debt sooner. For instance, if you are aware of money-saving features such as an offset account or the ability to make additional repayments, and use them to your advantage, then you can leverage significant cost savings over the life of your loan. Let’s put this into practice.

Genevra makes extra repayments

Home buying guide 4 case study After doing some research and speaking to a broker, Genevra discovered that making additional repayments could help reduce her interest charges over the life of her home loan. Although she is short on cash at the moment, Genevra is expecting a promotion in the next few years with a boost to her annual paycheque. With a $600,000 home loan at 5.5% interest, Genevra works out that if she starts making additional monthly repayments of $150 five years from now, she could save a total of $72,489.37 in interest over the 30-year term, and she would shrink her loan term by 3 years. Upon discovering the cost savings of this feature, Genevra decides to conduct more research into different home loan features to see if there are any other ways that she can lower her repayments.

Estimate home loan costs

As discussed in the first section of the Home Buying Guide, there are several upfront and hidden costs associated with servicing a home loan (and being a homeowner). Here’s a recap of some major upfront and ongoing costs that you’ll need to factor into your budget.

Upfront costs

If you bought a property worth $400,000 at an interest rate of 5.0% over 30 years, here is a summary of some major costs.

  • Stamp duty. The amount of stamp duty tax depends on the state of the property. In this example you would pay roughly $7,175.00 if you were based in Queensland.
  • Legal charges. This will depend on the complexity of legal work required, but as a ballpark figure you could be looking at around $1,000 - $2,500.
  • Building and pest inspection. It’s important to get a building and pest inspection completed to ensure that the property is structurally sound and that it conforms to the relevant building code. For inspections, you can expect to pay around $500 - $700.
  • Mortgage application fee. Also known as an establishment fee, you will pay approximately $200 - $600 for the loan application fee, but this will vary depending on the lender.
  • Valuation charges. Some lenders may charge you to get your property independently valued, so if your bank doesn’t waive this cost, it could be around $400 - $500 on average.

Ongoing costs

  • Mortgage repayments. Assuming the above example, your monthly repayments for this $400,000 loan would be $2,147.29 with a total loan cost of $773,023.14.
  • Account-keeping fees. Some lenders charge annual service fees, or ongoing fees, which can range anywhere from $50 - $350.
  • Repairs and maintenance. Being a homeowner comes with a high level of financial responsibility, and as a result you need to have a buffer of funds to help cover unexpected repairs and maintenance for the property. As a ballpark figure, you may want to have $5,000 - $10,000 in a high-interest savings account to help cover property associated expenses.
  • Insurance. It is crucial that you take out home and contents insurance to protect your asset as well as your family’s financial future.
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How much can you afford to borrow?

While you would have previously reviewed your financial position and considered the property price range that you can afford, you need to decide how much you need to borrow. Consult a licensed mortgage broker to help you understand your borrowing capacity from the perspective of the lender (note that the amount you think you can afford to borrow may differ from what the lender thinks you can afford to borrow). A broker will be able to review your income, assets, liabilities and credit history in order to identify the amount that a lender will realistically let you borrow. Use our calculator below to work out how much you can afford to borrow.

How much deposit do you need?

As a rule of thumb, you want to come up with at least a 20% deposit for a full documentation loan so that you can avoid paying lenders mortgage insurance (LMI). Most Australian lenders require you to pay LMI if your loan-to-value (LVR) ratio is below 80%. Enter your details in our savings calculator to estimate how long it'll take you to save your required deposit. If you are unable to muster up the funds to complete a 20% deposit, there are several low deposit home loans available on the market that allow you to borrow with a minimal deposit amount. If you’re a first home buyer or you’re short on cash, you can consider using a guarantor home loan to help boost your borrowing power. This involves a close family member providing security for the loan if you’re unable to meet your mortgage commitments.

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Get feature savvy

Additional repayments

The ability to make unlimited additional repayments is a useful feature for many borrowers. An extra repayment goes towards the principal amount of the loan, which can help you repay your loan sooner. For example, if you paid just $50 extra per month on a $300,000 loan, you could save over $23,000 in interest over the 30 year term and reduce the term by two years. Bear in mind that some loans, including fixed rate loans charge penalties for making additional repayments or may even restrict you from making them altogether. When comparing home loans (and lenders), this is a good feature to consider. Are you able to easily make additional repayments without penalty?

Redraw facility

If you need to draw on any additional repayments that you’ve made, a redraw facility allows you to access this money as you see fit. If an unexpected expense arises or you need extra funds to pay for a bill, the redraw facility allows you to access and withdraw this money. Check to see whether the lender allows you to use the redraw facility free of charge and whether there are any minimum or maximum redraw amounts. Some redraw facilities may even limit the number of redraws you can make in a year, or have a minimum amount per transaction.

Offset account

An offset account allows you to save on interest. Similar to an everyday transaction account, you can deposit your savings into the offset account linked to your home loan, and the amount held in the account reduces the amount of interest you pay on your loan each month. This means that the savings in your offset account are working at the same rate of interest as your home loan. For example if you have a home loan of $300,000 and you have $10,000 in your offset account, each month you will only be paying interest on $290,000 of your home loan.

Offset account

Portability

The portability feature allows you to keep your home loan when you move. It’s likely that your needs will change over the 30 years of your home loan, and it is common for people to move to a different property. If your loan has a portability feature you can keep the same loan you have and transfer it to your new property. This means you can maintain a relationship with your lender and could save by not having to pay establishment or application fees for a new home loan. When you transfer a loan from your old home to your new home you may have to pay a security substitution fee, which can typically be around $500. You may also need to pay a mortgage registration fee, valuation charges and fees for transferring the new loan so these fees can sometimes add up to just as much as the cost of refinancing. If you’re thinking of using the portability feature, carefully consider the costs involved.

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Compare home loans

Once you have a grasp on the amount you can afford to borrow, and different home loan features, you need to compare home loans. Doing some comparative research and finding a competitive home loan could end up saving you thousands of dollars over the lifetime of your loan. Here is how you can compare different home loans on the market.

    • Review your personal and financial situation

Think about your current financial and lifestyle objectives and decide what kind of home loan will allow you to achieve these goals. For instance, if you’re a first home buyer you may want to find a basic “no frills” home loan with a competitive interest rate, no application fees and minimal ongoing fees. On the other hand, if you’re a young family and you’re planning to move house in the near future, then you may want to apply for a fixed rate home loan (for security) with a portability feature.

    • Compare home loans

After identifying the home loan type (and features) that you’re looking for, you need to do some groundwork and compare different home loan products. Use our home loan comparison tables to compare the major features of home loans, including the interest and comparison rate, the LVR, and any major fees associated with the loan such as application fee and ongoing fees.

Compare current home loan rates

Rates last updated November 19th, 2017
$
Loan purpose
Offset account
Loan type
Your filter criteria do not match any product
Name Product Interest Rate (p.a.) Comp Rate^ (p.a.) Application Fee Ongoing Fees Max LVR Monthly Payment Short Description
3.65%
3.66%
$0
$0 p.a.
90%
Enjoy a low variable rate with no ongoing fees and borrow up to 90% of the value of the property.
3.64%
3.66%
$0
$0 p.a.
80%
A basic home loan with a competitive rate and low fees.
3.69%
4.86%
$0
$395 p.a.
90%
A special rate for first home buyers buying residential property and borrowing over $150K. 350K NAB Rewards Points offer available. Terms and conditions apply.
3.49%
4.47%
$0
$375 p.a.
90%
Discount off an already competitive interest rate for loans over $150k. NSW, QLD and ACT residents only.
3.58%
3.59%
$0
$0 p.a.
80%
A competitive variable rate product with low fees offered by a 100% online lender.
3.99%
4.62%
$395
$0 p.a.
80%
Fix your interest rate and pay principal and interest repayments on your investment.
3.54%
3.56%
$0
$0 p.a.
80%
Exclusive Offer to finder.com.au

This loan is exclusively available on finder up to and including 22 November (enquiries must be submitted by that date). This loan is for refinancers only. A basic but flexible low-rate loan for refinancers looking to save on repayments.

3.58%
3.58%
$0
$0 p.a.
70%
A low interest rate home loan with no application or ongoing fees.
3.44%
3.45%
$440
$0 p.a.
80%
This variable loan has a sharp rate, low fees, flexible repayment options and an offset account. This loan is available for PAYG borrowers only.
4.19%
4.22%
$0
$0 p.a.
90%
Access a fee-free offset account and a special interest rate for investors.
4.64%
4.01%
$0
$0 p.a.
80%
Enjoy a fast application process and flexible repayment options with this fixed rate investment loan.
4.14%
4.14%
$0
$0 p.a.
80%
An investment home loan with competitive rate and 100% offset account.
4.79%
5.44%
$0
$395 p.a.
95%
Package your 4-year fixed rate investment loan and pay no application fees.
3.54%
3.56%
$0
$0 p.a.
80%
For new home buyers only. No refinance option. A low interest variable home loan with no application fee and free redraws. Offer ends 30th Nov.
3.64%
3.64%
$0
$0 p.a.
70%
A basic variable home loan that offers a competitive interest rate with no application fees and no ongoing fees.
4.49%
4.52%
$0
$0 p.a.
80%
An interest-only loan for investors. Access equity to further your investment opportunities.
3.69%
3.69%
$0
$0 p.a.
90%
A special limited time offer for owner occupiers. An IMB Transaction Account must be opened with this loan.
3.62%
3.64%
$0
$0 p.a.
80%
Exclusive Offer to finder.com.au

This loan is exclusively available on finder up to and including 22 November (enquiries must be submitted by that date). This loan is for refinancers only. Switch from your current loan to this low-rate, flexible and feature-packed refinance special.

3.69%
4.01%
$0
$299 p.a.
95%
A loan with no application fee and borrow up to 95% LVR.
3.64%
3.66%
$0
$0 p.a.
80%
A home loan with a competitive variable rate, limited fees and plenty of flexibility.
3.65%
4.84%
$0
$395 p.a.
90%
A 2 years fixed platinum package that has $0 application and a loan redraw facility.
3.69%
3.72%
$0
$0 p.a.
80%
A low rate home loan with no ongoing fees.
3.99%
4.00%
$0
$0 p.a.
80%
A low-fee variable rate investor loan with a fast online application process.
3.69%
4.15%
$395
$0 p.a.
80%
A one year fixed rate offer with no ongoing bank fees.
3.74%
3.74%
$0
$0 p.a.
80%
A basic owner-occupier home loan with a low variable rate that requires a 20% deposit.
3.64%
4.03%
$0
$395 p.a.
80%
Apply for a new owner occupier loan or refinance from another lender and receive this discounted rate.
3.78%
3.79%
$0
$0 p.a.
95%
A no frills loan with a competitive rate and a maximum LVR of 95%.
4.09%
4.11%
$0
$0 p.a.
80%
Pay no application fee on this low variable rate investment home loan.
3.79%
4.11%
$0
$299 p.a.
80%
A fully featured home loan with an offset account and discounts available.
3.68%
3.83%
$0
$10 monthly ($120 p.a.)
80%
A low interest rate home loan that allows borrowers to borrow up to 80% of the property value.
3.64%
3.78%
$0
$10 monthly ($120 p.a.)
80%
A competitive variable rate home loan with flexible features. You can earn 30,000 Velocity Points for every $100k you borrow (for a limited time, subject to eligibility requirements).
3.74%
3.74%
$0
$0 p.a.
80%
Combine a low variable interest rate and free redraw with no application or ongoing fees.
3.72%
3.75%
$600
$0 p.a.
80%
A maximum 80% LVR home loan with no ongoing service fees and a linked transaction account.
3.72%
3.74%
$0
$0 p.a.
80%
Take advantage of a 100% offset account along with no annual or application fees.
3.77%
3.81%
$200
$0 p.a.
95%
A basic home loan with a low interest rate and a redraw facility available.
3.74%
4.15%
$0
$395 p.a.
80%
Enjoy a discount of a competitive interest rate and 100% offset account.
3.88%
3.81%
$0
$0 p.a.
95%
A competitive 3-year fixed rate loan with a high max insured LVR.
3.85%
4.97%
$300
$10 p.a.
95%
A flexible, competitive fixed rate loan that allows for extra repayments.
3.69%
3.75%
$600
$0 p.a.
80%
A low interest rate variable home loan with no ongoing fees.
3.79%
4.00%
$0
$10 monthly ($120 p.a.)
90%
Get a competitive interest rate for 3 years and a discounted variable rate when the fixed period ends.
3.81%
3.81%
$0
$0 p.a.
80%
A home loan with a competitive rate and plenty of handy features.
3.94%
4.88%
$0
$0 p.a.
90%
Enjoy a low interest rate and borrow up to 90% (with LMI) of your property's value.
3.74%
3.74%
$0
$0 p.a.
90%
A competitive variable rate with a redraw facility. NSW, QLD and ACT residents only.
3.73%
3.73%
$0
$0 p.a.
70%
A special low variable rate for owner occupiers with 100% offset account and no application or ongoing fees.
3.84%
3.84%
$0
$0 p.a.
110%
Requires a family member to act as guarantor. Discounted rate available with family pledge loans. Family pledge loans require no LMI and no deposit. NSW, Qld and ACT only.
3.85%
4.18%
$500
$0 p.a.
95%
Apply for Easy Street fixed rate home loans and get a competitive loan with a fixed interest rate.
3.88%
4.89%
$0
$395 p.a.
95%
A fixed rate package with flexible repayment options. 350K NAB Rewards Points offer available. Terms and conditions apply.
3.96%
3.98%
$0
$0 p.a.
90%
Take advantage of a redraw facility, competitive variable rate and no application or settlement fees for a limited time.
3.97%
4.02%
$445
$0 p.a.
90%
Get a competitive rate without features you may not use.
3.99%
3.99%
$395
$0 p.a.
80%
A flexible low-rate variable home loan that lets you combine your loan with other financial products.
4.09%
4.11%
$0
$0 p.a.
80%
A low variable rate loan with no application or ongoing fees.
3.97%
4.02%
$0
$0 p.a.
90%
A discounted interest rate home loan with no monthly fees.
3.97%
3.97%
$0
$0 p.a.
90%
A competitive variable rate home loan with no ongoing fees.
3.79%
3.80%
$0
$0 p.a.
80%
A competitive rate with no ongoing monthly fees or application fees.
3.72%
4.19%
$0
$0 p.a.
80%
Enjoy a variable 3 year introductory rate with the Bankwest Equaliser Home Loan.
3.84%
4.83%
$0
$0 p.a.
95%
Get a competitive 2-year fixed rate with no application or ongoing fees.
3.69%
4.00%
$0
$350 p.a.
95%
Fix your rate for 3 years and borrow up to 95% LVR.
$0
$0 p.a.
A basic low-rate home loan that still offers some useful features.
3.74%
3.74%
$0
$0 p.a.
95%
A low rate home loan with no application or ongoing fees. Note that to be eligible for this loan you must be QLD resident.
3.69%
4.45%
$0
$375 p.a.
90%
Discount off an already competitive 2 year fixed rate for loans over $150k. NSW,QLD and ACT residents only.
4.09%
4.25%
$300
$10 monthly ($120 p.a.)
80%
Get a competitive investment home loan rate without expensive features you may not need.
3.99%
4.02%
$600
$0 p.a.
90%
Take advantage of a 0.60% discount on your rate, a 100% offset account and no ongoing fees.
3.99%
4.77%
$0
$0 p.a.
95%
A competitive 3 year fixed rate with a redraw facility and split loan options, plus no application fee.
3.69%
3.69%
$0
$0 p.a.
70%
Enjoy a low variable rate with no application and ongoing fees.
3.88%
4.88%
$0
$395 p.a.
95%
Lock in a discounted fixed rate with a low service fee.
4.33%
4.33%
$363
$0 p.a.
70%
A variable home loan with $0 annual or monthly fees.
3.99%
4.03%
$0
$0 p.a.
95%
Enjoy a basic home loan with a high LVR and no application or ongoing fees.
3.85%
4.95%
$0
$395 p.a.
95%
A discounted package rate for owner occupiers with the ability to package a Qantas rewards earning Amplify credit card. $1,500 cashback available for refinancers. Conditions apply.
3.99%
4.99%
$0
$395 p.a.
95%
A package home loan with fee free extra repayments available during the fixed term.
4.39%
5.42%
$300
$10 monthly ($120 p.a.)
95%
Borrow up to and fix in a 3 year home loan rate. Access your account via internet and phone banking.
3.69%
4.03%
$0
$299 p.a.
80%
Enjoy a low variable rate with no application fee.
5.29%
5.64%
$995
$15 monthly ($180 p.a.)
65%
Available for former bad credit borrowers who have had a clean credit file for the last 24 months. Loan can be used to purchase a property or refinance.
3.75%
4.44%
$0
$0 p.a.
95%
This competitive introductory rate is a limited time offer for new owner-occupiers
3.68%
3.69%
$600
$0 p.a.
90%
Get a low variable rate along with some important basic features.
5.59%
5.94%
$995
$15 monthly ($180 p.a.)
55%
Available for borrowers with bad credit history. Can be used for purchase or refinance even with negative listings on your credit file.

Compare up to 4 providers

When comparing home loans, here are some factors to consider:

  • Interest rate. Ideally, you want to find a home loan that offers a competitive interest rate by market standards. A lower interest rate can go a long way in helping you maximise your savings. For example, a 0.5% rate difference on a $750,000 mortgage (from 5.5% to 5.0%) could save you a total of $83,612 over 30 years. You should always compare the comparison rate of different home loans, as this reflects the true cost of the loan by taking fees into account.
  • Fees. When comparing different home loans, you should keep an eye out for application or establishment fees, ongoing fees and discharge fees. Finding a home loan with fewer fees will help you to minimise your holding mortgage costs.
  • Features. As mentioned previously, there are many competitive features available that can help you save money. Compare if the lender allows you to make additional repayments without penalty, if a free redraw is available, if a 100% offset account is available, if split loans are offered, if the lender provides packaged discounts, and if salary crediting is offered.
  • Repayment frequency. Another important thing to compare is the repayment frequency offered by the lender. Do they allow you to make weekly, fortnightly or monthly repayments to suit your income? Keep in mind that making bi-monthly repayments (as opposed to monthly repayments) can help you lower your repayments and help you reduce your loan term. Check to see if the lender allows you to make principal and interest or interest-only repayments and whether they will allow you to take a repayment holiday if you’re having trouble meeting your mortgage obligations.
  • Customer service. Another point to consider for your research is the quality of customer service provided by the lender. How often do they promise to send you account statements? Do they offer online banking? Do they offer BPAY or other payment options?
  • Chat to the experts. Before applying for finance, speak to a professional mortgage broker, accountant and financial adviser to ensure that you are making an informed decision regarding the type of home loan that’s right for you. While an accountant and financial planner can help you plan for a financially secure future, a licensed mortgage broker can help you with the home loan application process. A broker has expert knowledge of how the home loan industry works, as well as the local property market, and can help you complete the paperwork, assist you with the application process and answer any questions that you have. A broker has access to a wide range of home loan products from a panel of lenders. After discussing your financial objectives with the broker, they will search through their database to find a loan that is suitable for you. If you’re a non-conventional borrower, for instance if you have bad credit, you’re receiving Centrelink benefits or you’re a low income earner, a broker can be useful in terms of finding alternative or specialist lenders that may have more lenient eligibility criteria compared to the Big Four.
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Improve credit status

If you don’t have a good credit history, you may want to think about improving your credit file before applying for a home loan (or pre-approval). Here are some ways you can improve your credit position.

  • Trim existing debt. Review your debt to see if there’s any unnecessary debt that you can minimise. For example, if you have three different credit cards with different providers, you may want to consider rolling these into one.
  • Pay on time. It is essential that you pay your bills in full and on time. Whether it's a phone bill or a utility bill, ensure that you are meeting your financial obligations. If you’re struggling to cover your bills, contact your provider to see if you can organise a different payment plan.
  • Regularly check your credit file. So you can understand how the lender perceives you, request a copy of your credit file. This will allow you to gain insight to your credit history so that you can take steps to improve your credit position.
  • Don’t over-apply. Rejected applications are recorded on your file so having a credit application declined can adversely affect your ability to borrow in the future. Be selective about the number of home loans that you apply for.
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Apply for pre-approval

Getting pre-approval is an important step in the home buying process. This gives you an approved amount to borrow which provides you with greater bidding power and confidence when it comes to making an offer on a property. With a pre-approved home loan under your belt, you’ll be considered a more serious homebuyer because it demonstrates that a lender has made a commitment to lend you the money. It also gives you a clear idea of how much you can spend.

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Apply for a home loan

Most home loan applications can be completed online or by visiting the lender at your closest branch. When you apply for a home loan, you’ll generally need to supply certain information to the lender, such as:

    • Personal details. You’ll need to provide documentation that confirms your personal details including date of birth, residential address, employment situation and number of dependents. The lender may request your driver’s license, passport, birth certificate and recent payslips.
    • Income. You’ll need to provide details regarding your employment and income, such as recent payslips or a letter from your employer confirming the nature of your employment contract. If you're self-employed you have to submit tax returns for the previous two years, financial statements for the last two years and contact details for your accountant.
    • Assets. The lender will typically request any details of assets that you have, such as investment properties, a vehicle or shares.
    • Liabilities. You may also need to supply information about any existing liabilities that you have such as credit cards or personal loans.
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Are you eligible for a government grant?

The Australian government offers grants to assist homeowners purchase property. In particular, if you’re a first home buyer you may be eligible for stamp duty concessions and a monetary grant which could help you get into the property market. Read our first home ownership guide to learn about the government grants that may be available to you. Indigenous Business Australia (IBA) also offers grants to Indigenous Australians looking to break into the property market while the Australian Defence Home Ownership Scheme (DHOAS) is available to members of the Australian Defence Force (ADF) that meet the eligibility requirements.

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Once you’ve researched different home loan products and organised your finance, read the next phase of the home buying journey. Images: Shutterstock

Belinda Punshon

Belinda is a journalist here at finder.com.au. Specialising in the home loans and property sections, she is passionate about helping Australians improve their financial wellbeing.

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