Choosing the best home loan. How to compare home loans to get the best deal.
- Yellow Loans
- Jan 14, 2022
- 5 min read
Between the excitement of owning a home and the stress of making such a large life changing purchase, people are in a stressful mindset while they’re researching loans. It’s an incredibly daunting process and Aussies want to arm themselves with as much helpful information and as many resources as possible.
If you are looking for a good home loan deal, then interest rate matters.
A home loan is a long-term commitment, so even a small reduction in interest rates can mean a significant savings over time.
There a vast range of home loans on the market, from a range of lenders that offer different features and options. These home loans can offer borrowers the flexibility to pay your loan off faster, or access funds in the future. These options can cost you more, so make sure that you decide which features are most important so that you can get the best value out of your home loan.
Choose a Principal and Interest if you want to pay off your home loan
Principal and interest home loans
These are the most popular home loans. With regular repayments on the borrowed amount (the principal) plus the interest, you ca pay off your loan over an agreed period of time.
Interest-only home loans
With these type of loans, for an initial agreed period, your payments only cover the interest on the loan, so you are not paying off the amount you borrowed. This means that your debt isn't being reduced. This might mean lower repayments during the interest only period, but they will go up after that.
Choose the shortest loan period you can afford
Your loan period impacts the size of your home loan repayments and how much interest you will pay over time. A shorter loan period might mean higher repayments, but you will save on the interest
Your loan term is how long you have to pay off the loan. It impacts the size of your mortgage repayments and how much interest you'll pay.
A shorter loan term (for example, 20 years) means higher repayments, but you'll pay less in interest.
A longer loan term (for example, 30 years) means lower repayments, but you'll pay more in interest.
Aim for the lowest interest rate
An interest rate even 0.5% lower could save you thousands of dollars over time.
Fixed interest rate
A fixed interest rate stays the same for a set period (for example, five years). The rate then goes to a variable interest rate, or you can negotiate another fixed rate.
Pros:
Makes budgeting easier as you know what your repayments will be.
Fewer loan features could cost you less.
Cons:
You won't get the benefit if interest rates go down.
It may cost more to switch loans later, if you're charged a break fee.
Variable interest rate
A variable interest rate can go up or down as the lending market changes (for example when official cash rates change).
Pros:
More loan features may offer you greater flexibility.
It's usually easier to switch loans later, if you find a better deal.
Cons:
Makes budgeting harder as your repayments could go up or down.
More loan features could cost you more.
Partially-fixed rate
If you're not sure whether a fixed or variable interest rate is right for you, consider a bit of both. With a partially-fixed rate (split loan), a portion of your loan has a fixed rate and the rest has a variable rate. You can decide how to split the loan (for example, 50/50 or 20/80).
Mortgage features come at a cost
Home loans with more options or features can come at a higher cost. These could include an offset account, redraw or line of credit facilities. Most are ways of putting extra money into your loan to reduce the amount of interest you pay.
Weigh up if features are worth it
For example, suppose you are considering a $500,000 loan with an offset account. If you're able to keep $20,000 of savings in the offset, you'll pay interest on $480,000. But if your offset balance will always be low (for example under $10,000), it may not be worth paying for this feature.
Avoid paying more for 'nice-to-have' options
When comparing loans, consider your lifestyle and what options you really need. What features are 'must-haves'? What are 'nice-to-haves'? Is it worth paying extra for features you may never use? You may be better off choosing a basic loan with limited features.
Work out what you can afford to borrow
Be realistic about what you can afford. If interest rates rise, your loan repayments could go up. So give yourself some breathing room.
Compare home loans
With the amount you can afford to borrow, we will compare home loans from at least two different lenders. This includes check the loan interest rates, fees and features to get the best loan for you.
Comparison websites can be useful, but they are businesses and may make money through promoted links. They may not cover all your options.
What to keep in mind when comparing home loans.
Interest rate (per year) | interest rate advertised by a lender |
Comparison rate (per year) | a single figure of the cost of the loan — includes the interest rate and most fees |
Monthly repayment | how much you'll have to pay each month on a loan |
Application fee | one-off payment when starting a loan, also called establishment, up-front or set-up fee |
Ongoing fees | fees charged every month or year for administering a loan, also called service or administration fees |
Loan term | length of time a loan lasts |
Loan features | such as offset account, redraw or line of credit, and their fees (for example to redraw money) |
Using a mortgage broker
A mortgage broker is a go-between who deals with banks or other lenders to arrange a home loan. Mortgage brokers must act in your best interests when suggesting a loan for you.
A good broker works with you to:
Understand your needs and goals.
Work out what you can afford to borrow.
Find options to suit your situation.
Explain how each loan works and what it costs (for example, interest rate, features and fees).
Apply for a loan and manage the process through to settlement.
Below you will find some useful links that will provide you with all the information you need to make the best loan decision. In the meantime if you want some free professional assistance, you can contact a loan specialist on 1300 199 964
or
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