Features to help you choose the right first home loan
From deposits, to monthly repayments and interest rates, taking out your first home loan can be daunting. That's why we've identified five features that should be on your checklist if you're taking out your first mortgage.
Take these features into consideration and you'll end up with a competitive home loan that allows you to minimise the interest payable on your loan and reach home ownership sooner.
1. Redraw Facility
A redraw facility allows you to withdraw additional repayments that you have already put towards your home loan.
Redraw facilities provide you with flexibility to put as much extra money as you like towards your loan, with the peace of mind in knowing you can access it at any time. These facilities also encourage you to put more money towards the loan, so for those budget conscious home buyers, you can think of it as ‘saving for a rainy day.’
Redraw facilities, in conjunction with making extra monthly repayments, enable you to pay less interest over the life of the loan.
2. Low Discharge Fees
A discharge fee is charged upon full payment of the home loan, or at the end of the loan. The discharge fee is designed to cover the costs that the lender will incur when you terminate your account.
Keep an eye out for lenders offering low or no discharge fees, as this will provide you with greater flexibility to switch between lenders should your situation change or should you find a more competitive offer.
The government introduced a mortgage exit fee ban on all new variable home loans taken out after July, 2011. While this improved the situation for those taking out a variable rate loan, these fees are still applicable for fixed rate loans.
As a first time home buyer, you should be careful of high discharge fees that can be incurred if you want to pay off your home loan ahead of time, or want to refinance an existing loan. In particular, you should be skeptical of these exit fees for loans that offer low or no upfront fees.
3. Low Rates
To find a low interest rate loan, start comparing the interest rates and loan features of several Australian home loans in the table provided on this page. Comparing these home loans these side-by-side will allow you to easily identify the most competitive rate that will suit your needs.Whether you’re purchasing a home as an investment or a residential property, a low interest rate will see you pay less towards repayments, reducing the time required to pay off your loan and the total interest you’ll repay.
Be sure to carefully read the terms and conditions of loan packages, as many low interest loans may only offer a competitive rate for an introductory period, for instance for the first 3 months since your application.
Using the comparison rate as a starting point for comparing different home loan rates is a great start. The comparison rate is a percentage amount calculated by adding together the interest rate, plus any additional fees and charges associated with the loan. The total figure is then converted into a percentage rate to highlight the true cost of the loan. By displaying the comparison rate, lenders are unable to hide any fees, charges or other costs.
It is a government requirement that all lenders use the comparison rate to more accurately reflect the real cost of a home loan.
However, it is important to understand the relative cost of fees in the comparison rate. That is, the fees included in the comparison rate will become less significant as your loan amount increases. For example, for large loan amounts, such as $600,000 over 30 years, the interest rate becomes a more important consideration because the annual fee, for instance, becomes a much smaller percentage of the overall loan cost.
More: You can use our comparison table to easily compare home loans based on the comparison rate.
4. No Ongoing Fees
Buying your first home can be challenging enough without having to cough up for extra account-keeping fees. When combined with the right features, loans with no ongoing fees are a great option for savvy first time home buyers. This is because they reduce the cost of your loan while often providing competitive rates that enable you to control your repayments.
Loans with no ongoing fees allow you to pay your upfront costs, such as application fees, without having to worry about any other costs creeping up on you throughout the life of your loan.
Typically, many lenders will charge ongoing monthly fees to maintain your home loan account or to pay for additional features like 100% offset accounts. Package loans, which bundle your home loan with a credit card and savings account from the same lender also tend to charge ongoing annual fees which cost between $200 - $500.
To compare home loans with no ongoing fees, try to identify what ongoing fees you are avoiding. In many cases, a loan might waive monthly or annual fees, but still charge fees for offset or redraw facilities, which could add a considerable cost to your home loan.
5. LMI Charges
There are two ways that you can avoid paying LMI:Lenders Mortgage Insurance (LMI) is a one-off insurance payment that protects your lender in the event that you default on your loan. LMI is typically paid when the Loan to Value Ratio (LVR) is 80% or more. That is, when 80% or more of the property is borrowed.
However, LMI may apply to properties below the 80% LVR ratio if the bank believes you’re a greater risk, for example if you’re a self-employed borrower.
- Save 20% or more as a deposit;
Saving 20% of the value of a property is a difficult task for many first home buyers. In Sydney, to buy an average unit valued at $400 000, you’d require a deposit of $80 000. While this seems like an unrealistic option for first time home buyers, LMI provides an avenue for those who are unable to find a guarantor.
- Find a guarantor;
A guarantor is a close family member, such as your parents, who assume financial and legal responsibility for a portion of your loan, allowing you to borrow more or bulk up your deposit. The guarantor is not liable for the full amount of the loan, but a portion of the loan. This allows you to borrow more than the value of a property to cover expenses.
Top Home Loans for First Home Buyers
Save money by avoiding additional costs
If you’re a first time home buyer you should be conscious that there are often additional costs associated with purchasing a property. The most expensive fee that you’re likely to incur is state government stamp duty if it’s applicable in your location, so make sure your budget takes this into account. Also, don't forget about building inspection costs.
Understanding the features of a home loan will be invaluable to helping you make the right investment choice.
Happy first-time home buying!