Selecting the right home loan is a big decision. Help yourself make the right one by learning how to choose a home loan.
Choosing a home loan can be a difficult task as it can be hard to differentiate between products to decide which ones are suited to your needs. Below are some of the most common types of home loans:
Variable: A variable home loan is a loan where the interest rate is not locked in. With a variable rate home loan, your interest rate fluctuates in line with the official cash rate set by the Reserve Bank of Australia (RBA). Variable rate home loans are good for those who want to take advantage of potential low interest rates and generally come with more features. However, you must be prepared that the interest rate will move up and down. In this regard they are less secure than a fixed home loan.
Fixed: With a fixed rate home loan, your interest rate is locked in for a fixed period - usually between 1 - 5 years. Fixed home loans allow for better planning as you can work out your repayments upfront, and have the peace of mind knowing that your interest rate will remain unchanged during the fixed period. However, these loans tend to have less flexibility and you may miss out on a potentially lower interest rate. With some fixed loans, you may also not be able to make additional repayments.
Split: As the name suggests, a split home loan is one that is split between variable and fixed rates. Part of your home loan is variable and part is fixed. This potentially allows you to get the some of the benefit of both loans and have the security of a fixed rate, while still being able to take advantage of potential rate changes with a variable rate.
What is a comparison rate?
Comparison rates measure the interest rate including regular fees and establishment costs over the 25 year life of a $150,000 loan. Comparison rates are a handy indicator to help people compare home loans more easily.
Another choice you have is between a regular loan and a packaged loan. A packaged loan is different from a regular loan as you can package your loan with other financial products from the same lender, such as a credit card or a transaction account. Packaging your loan usually comes with discounted rates and lower fees.
Low doc: Low doc home loans are appropriate for those who have difficulty showing documentation of their employment and income, such as those who are self-employed. Low doc home loans are flexible loans designed for those who are self-employed because you don’t have to show evidence of savings or income. This type of loan may also be appropriate for someone who is a new Australian or a full time investor who can’t prove their income. Your credit history will be checked with these loans and you’ll usually have to pay higher fees or interest rates, or only be able to borrow a maximum of 60% of the property value.
Full doc: Full doc home loans require you to meet the normal documentation standards required to complete your home loan application. This means evidence of your income, debts and assets.
Compare home loans now
One of the most important elements to compare are the interest rates. This includes both interest rates and comparison rates. The comparison rate will help you identify the true cost of the loan so it’s important to compare comparison rates and look for the lowest comparison rate. Also, look out for any rate discounts you may be able to get or be eligible for.
Fees are another important part of your home loan that can lead to larger costs down the track. This is why it’s important to be aware of all the fees you may be liable for and compare loans based on fees. There are a range of fees you need to look out for and compare such as:
- Application fees
- Legal fees
- Settlement fees
- Exit fees
- Account-keeping fees
- Annual fees
You should be able to find detailed information about the fees a home loan has in the Product Disclosure Statement (PDS) of each individual loan.
Some loans have more features than others. It’s important to first decide what features are most important to you in a home loan and then compare home loans based on the features that matter to you. Some features you should compare and questions you should ask include:
- Can I redraw additional payments I make?
- Can I make additional repayments?
- Are there branch networks?
- Can I open an offset account?
- Can I split my loan?
Make sure to pay attention to how the home loans you're comparing are repaid. Many loans offer flexible repayments, and allow you to pay weekly, fortnightly or monthly. Variable rate home loans typically allow you to make unlimited additional repayments, while fixed rate home loans will often have a capped amount of extra repayments you can make before incurring a penalty.
You'll also want to decide whether you're better suited to a principal and interest or interest-only loan. When you make payments on a principal and interest loan, part of your repayment reduces the overall amount you owe while part pays for interest charges. An interest-only home loan will only charge you for interest and your repayments won't reduce the principal.
Interest-only loans are set for a pre-determined period of time, usually 1-5 years. After this time, the loan will revert to principal and interest repayments. Choosing an interest-only product will reduce the amount of your repayments, but you won't be making headway on paying off the principal, or initial amount borrowed. Consider carefully whether or not this type of loan is right for you.
Incentives are also important to compare among home loans. One incentive to look out for is if you can waive any fees if you meet any requirements or conditions. This is a great incentive to assist you in saving money. Some home loans also offer incentives such as the ability to earn Qantas Points just by establishing and paying off a home loan, or sweeteners such as free holidays. Another incentive you may also receive is a cashback. This is when you get a cash rebate after your loan is settled. Another common incentive is discounted rates. These types of incentives give you more than just a regular home loan so it’s important to compare.
Not everyone will be eligible for every type of loan and certain loans may be more suited to people based on their borrowing situation. Some home loans may be restricted based on the square meterage of the property, your income, employment status (e.g. those who are self-employed should consider low doc loans), how much you need to borrow, if you’re an Australian resident or not, and your age. Compare home loans based on your eligibility for them.
Don’t let the stress of finding the right home loan prevent you from purchasing your own home. Choosing a home loan no longer needs to be difficult now that you know what to look out for and what to compare. Start your own home loan comparison today to find the right one for you, or check out one of finder.com.au’s home loan calculators to get a better understanding of your borrowing capacity.