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September 30th, 2015
IN THIS REPORT To fix or not to fix: it’s a question that many home buyers struggle with. On the one hand, locking in an interest rate provides certainty of repayments over the term (which can provide peace of mind when it comes to budgeting). On the other hand, staying variable means you can get the instant benefit of future rate cuts. ...read more
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About Home Loans
Owning a house is part of the “Great Australian Dream” for many and over the past decades ownership rates in Australia have fluctuated by only a few percentage points. Currently, home ownership rates are just under 70%.
Whether a unit or house though, buying a home takes a great deal of planning. It is likely to be one of the largest financial commitments you will ever make – and your home loan is likely to be one of the largest debts you ever commit to. So it’s worth spending the time upfront to get it right! CANSTAR assess approximately 1,300 home loans from more than 100 providers across Australia, to help you compare home loans find an outstanding-value loan to suit your needs.
What is a home loan?
A “home loan” or “mortgage” is a loan advanced to you by a financial institution in return for security over the property you are using the loan to buy. Typically a home loan will be a 25 or 30 year term, with regular repayment amounts fortnightly or monthly that are designed to pay off the loan over the contracted term.
The loan is secured against your property so if you are unable to continue paying the loan, the lender may ultimately require you to sell the property to settle the debt.
Given property prices in Australia, a home loan is realistically the way by which the majority of people will afford to buy a house.
Types of home loans
There are a number of different types of home loans in Australia. The three most common types of home loans are:
A fixed rate home loan:
The fixed rates on home loans are historically low at present. A fixed rate loan simply means that the interest rate is “fixed” for a certain amount of time – commonly 1, 2,3, 4 or 5 years.
The main advantage of a fixed rate loan is that it gives you certainty of repayments over the fixed term; because the interest rate is guaranteed not to go up (or down) over the fixed period, it can be a way to budget your costs.
The main disadvantage of a fixed rate loan is the inflexibility: generally large additional payments cannot be made and you may face a “break fee” if you decide to sell before the end of the fixed term.
A variable rate home loan:
A variable rate loan means that the interest rate will rise and fall (vary) over the period of your home loan. This may be in response to movements in the official cash rate or may simply be a business decision by your financial institution.
The main advantage of a variable rate loan is flexibility. While you must meet your minimum monthly repayment, you can usually pay more if you want to. There is also no cost penalty if you decide to sell your property and move. Read about potential cost penalties here.
The main disadvantage of a variable rate loan is that your minimum repayment amount may rise or fall at any time. If you are on a tight budget, this could be a real problem for you.
A split home loan:
A split loan is simply a combination mortgage whereby part of your home loan is on a fixed rate and part is on a variable rate.
When choosing the type of loan that would suit, first home-buyers should consider how long they intend to stay in the home. If the intention is only for a short while, a variable loan is more flexible and doesn’t entail “break fees”. On the other hand, if the intention is to live in the home long term, a fixed rate may offer the certainty of repayments the borrower is looking for. Of course, a split loan can be a good option, providing both flexibility and security.
An interest only home loan:
An interest-only home loan is one where only the interest is paid, rather than both the interest and the principle. This type of loan can be useful for investors who can claim the interest as a tax deduction, or buyers who only plan on holding onto the property for a few years before selling it. Interest-only home loans may not be a good idea for standard home-buyers simply looking to pay less on their weekly repayments, because the smaller the amount of loan principal that is paid off, the more overall interest you may end up paying on your loan over the years. Find out more about interest only home loans here.
Generally an interest-only home loan will have a short timeframe (between 1 – 5 years) before it reverts to a principal and interest loan. You can compare interest only home loans here.
A line of credit home loan:
A line of credit is a loan borrowed against the equity in your home. It gives you the ability and flexibility to access the loan at any time, up to the agreed limit, and to pay money into the loan at any time. It is not generally a loan set up to purchase a property, but rather set up against the equity in an existing property. You can compare line of credit loans here.
Home loan interest rates
CANSTAR currently researches, rates and compares approximately 1,300 home loans, to provide home buyers with certainty and confidence when they compare mortgages. And despite our currently-low official cash rate, home loan inters rates can very significantly between home loan providers.
Because home loans are a long-term debt, even small differences in interest rates can make a big difference to the total amount you will pay on your loan over its lifetime.
You can compare current home loan interest rates here. And ensure that you use our mortgage calculator to help you work out just what that home loan might cost you, both month by month and over the life of the loan.
Home loan fees
There are a number of fees that may apply to your home loan. Some of the common home loan fees are:
Account keeping fee: An account-keeping fee is a fee charged by lenders (often monthly) to help cover the administration cost of maintaining the loan. It may be called a “service fee”.
Annual fee: Some lenders may charge an annual fee rather than an ongoing account-keeping fee on certain mortgages. These may be a “package loan” where a number of deposit and credit accounts as well as your home loan are “packaged” up under one administrative cost.
Redraw fees: If your home loan has a redraw facility (an agreement whereby you are able to redraw some or all of any home loan payments in advance) there may be a fee associated with doing so.
Other ad-hoc fees may include a loan application fee and a valuation fee at the time of property purchase, a late payment fee if you miss a loan repayment and a discharge fee if you pay your home loan off early.
You should ask your lender to detail all fees that may apply to your home loan.
What does a home loan cost?
This is a question that we are often asked at CANSTAR, however it is a question that is impossible to answer definitively as it will depend on the size of your home loan, the term of your loan, the interest rate, the fees, whether you make any additional home loan repayments and how your interest rate fluctuates over time.
For purely illustrative purposes though, here is a basic example of indicative costs of a 25 year home loan at an interest rate of 5.5%.
|Home Loan size at commencement||Monthly repayment at 5.5%||Total cost over 25 years at 5.5%|
Try our mortgage calculator to input your own personal loan amount and loan interest rate, to gain a general idea of the likely cost of your home loan.
Other home loan features
There are many different features that may be attached to your home loan. These can include:
- An offset account
- A redraw facility
- The ability to make extra repayments
- The ability to split the loan between fixed and variable
- The ability to switch to a different type of loan
- Ability to pre-pay interest
- Online functionality
- Lending terms, including the LVR (loan to value ratio) allowable
- Guarantor security availability
A summary of features that we look for in an outstanding value home loan are contained in the Methodology attached to the Home Loan Star Ratings report.
Home Loan Glossary of Terms
Please note that these are a general explanation of the meaning of terms used in relation to home loans/mortgages.
Policy wording may use different terms and you should read the terms and conditions of the relevant policy to understand the inclusions and exclusions of that policy. You cannot rely on these terms to the part of any policy you may purchase.
Refer to the product disclosure statement and Canstar’s FSG.
Annual Percentage Rate – This is the total charge for the loan including fees and interest expressed as a percentage, which allows you to compare across the market.
Application fee – A fee paid to the lender for setting up a home loan.
Appraisal fee – A fee charged for a professional opinion about how much a property is worth.
Arrangement Fee – A fee some lenders charge for arranging your loan.
Asset – An asset is a resource controlled by the entity as a result of past events or transactions and from which future economic benefits are expected to flow to the entity.
Automatic transfer – a system that is set up to automatically transfer money from a one bank account into another account at a certain point in time to coincide with bills or payments.
Balloon loan (balloon mortgage) – A loan that has regular payments that do not cover the full loan by the end of the term, meaning a larger lump sum is due at maturity.
Bankruptcy – This is when someone’s debt problems get so serious, they are unable to pay their existing debts and bills. When this happens, it’s possible to apply to a court to be made bankrupt – which means that any assets you have such as savings will be used to pay off your debts. Normally after one year a person will be discharged from bankruptcy, but it will still have a negative impact on their credit rating and may stop them getting credit in the future.
Basis points – A basis point is equal to 0.01% interest. For example: 50 basis points is an interest rate of 0.50%
Bill of sale – A written agreement whereby ownership is transferred but the original owner is allowed to retain possession.
Biweekly mortgage – A home loan in which the payments are scheduled for every other week, rather than each month.
Break costs – The penalty fees charged when a borrow ends a fixed-rate loan contract before the fixed-rate period expires.
Bridging finance – A loan that can be used when buying a new home before selling an existing home, usually short-term.
Buydown – When the home buyer “buys down” the interest rate by paying an initial fee upfront, thereby reducing the size of future payments.
Caveat emptor – Latin for ‘let the buyer beware’.
Comparison rate – This includes the interest rate, payments, and most ongoing and upfront fees and charges in one rate reflecting the total annual cost of the loan, reduced to a single figure. On the Canstar website all comparison rates for home loans are based on a $150,000 loan over 25 years.
Consumer Credit Code – An act of Parliament governing the relationship between borrowers and lenders.
Countersigned – Additional signature or signatures to guarantee the validity of a document.
Credit Rating – An assessment of the credit-worthiness of individuals and corporations, based on their borrowing and repayment history.
Credit report – A report from an authorised agency that shows the potential borrower’s credit history. Lenders access the information in your file to help them decide whether to lend to you. They can also record a default on your file if you make loan repayments late, or don’t pay a utility bill. Every time you make an application for finance an entry is recorded on your file showing the lender you applied to, the type of finance, the amount and the date.
Credit/facility limit – The maximum loan amount that a borrower can borrow under their home loan contract.
Current Rate – The rate advertised by institutions not including fees, discounts and special offers.
Debt consolidation (consolidation loan) – A loan that replaces multiple loans with a single one, often with a lower monthly payment but a longer period of repayment.
Default – When a consumer fails to fulfil obligations to make the necessary payments on a loan.
Deposit guarantee – A substitute for a cash deposit to assist with the purchase of a property. Useful when the buyer has cash tied up in term deposits or shares, but the buyer is still required to pay the full purchase price at settlement.
Disbursements – The various costs your solicitor or conveyancer has to pay to other organisations and bodies on your behalf, for example, search fees and stamp duty/ land tax. Your solicitor or conveyancer will itemise the disbursements on the invoice they send you.
Down payment – The initial payment of the home loan, usually a small proportion of the total price.
Drawdown Rate – The date on which the borrower first uses the loaned money.
Empty nester – Someone whose children have moved out of their house, typically on the market for a smaller house.
Encumbrance - An outstanding liability or charge on a property.
Equity – The residual claim to ownership which the purchaser holds. For example if a house is valued at $200,000 and the owner has a loan of $120,000 against the property, the equity in the property is $80,000.
Exit Fee – A fee imposed by some lenders when the borrower decides to refinance with another lender within the first years of the loan. The good news is that in 2011 the Federal Government outlawed home loan exit fees.
Extra repayments – Some home loans allow you to make extra payments earlier/greater than the required amount.
FHOG – “First Home Owner Grant,” A federal government grant given to some first home buyers. Read more about the FHOG here.
Fixed Rate Home Loan – These home loans allow a borrower to lock in an interest rate for a particular period of time, typically 1 – 5 years. The interest rate that the borrow pays will remain the same for that amount of time, regardless of changes in the RBA official cash rate.
Foreclosure – When the homeowner defaults on the mortgage and has their interest in the property cut off. Usually leads to a forced sale of the home, with the proceeds going towards the mortgage debt.
Guarantee – Any undertaking which promises to pay an amount of funds upon the presentation of a claim or some other defined event (usually a financial default on the part of the entity for which guarantee was issued).
Guarantor - A person or company that endorses an agreement to guarantee that promises made by the first party (the borrower) to the second party (lender) will be fulfilled, and assumes liability if the borrower fails to fulfil them (defaults). In case of a default, the guarantor must compensate the lender, and usually acquires an immediate right of action against the borrower for payments made under the guarantee.
Interest Capitalisation – Addition of unpaid interest onto the principle balance of a loan. This balance will then earn additional interest in the same way initial principle balance does.
Interest in advance – When interest payments are charged at the beginning of a period, rather than the end.
Interest in arrears – When interest payments are charged at the end of a period.
Interest-only loan – A home loan in which there is no principle repayments required; the borrower simply pays the interest portion of the loan. However, this means that the borrower must always stay current with their payments and is usually only taken by property investors who want to keep even cash flows.
Introductory/ Honeymoon Rate – An introductory rate offered to entice borrowers with a low advertised rate for the first 6 to 12 months of the loan. Also enables the borrower to get established and buy necessary furniture, etc. for their home. After the honeymoon period, the loan reverts to the Standard Variable Rate offered by the lender.
Investment – Home-loan seekers who intend to use the house they are purchasing as an investment by renting it to other home-seekers.
Lenders Mortgage Insurance (LMI) – Insurance that the loaning institution takes out in case of default from the borrower. Tends to be required for home loans with an LVR of over 80%.
Low-doc home loan – Low documentation loans, designed primarily for the self-employed who don’t have the documentation required to get traditional home loans. Usually carry higher interest rates and required mortgage insurance, which add to the cost.
LVR – “Loan to Value Ratio,” which is the maximum proportion of the value of your home that can be loaned out to you. For example, a bank may approve your loan for 80% of the property value, in which you must pay the remaining 20%.
Mandatory Payment – There is a mandatory monthly minimum repayment due assuming there is a balance on the account
Maximum LVR – The maximum loan to valuation ratio. This means the amount you can borrow expressed as a percentage of the valuation of the security (usually the property you are buying). For example, 90% LVR means you can borrow up to 90% of the valuation of the property.
Mortgage Offset Account – Accounts that help reduce a borrower’s interest costs by offsetting savings held in an account against the principal owing on the mortgage. Read more about a mortgage offset account here.
Mortgage Stamp Duty – State government tax calculated on the borrower’s loan amount.
Negative Gearing – Where the income from an investment property is insufficient to meet the interest costs of the loan used to fund the investment property.
No Deposit Home Loan – A no deposit home loan allows you to borrow the full purchase price of a property without saving for a deposit. Typically you do not need to demonstrate a savings history, and only require funds to cover the transaction costs such as legal fees and any statutory charges such as stamp duty.
Non-conforming/ sub-prime Loan – Home loans for people who do not meet the standard criteria for traditional home loans (eg. Self-employed, poor credit rating, or those who have recently migrated to Australia). These loans typically have higher interest rates.
Overdraft - An arrangement on a cheque or savings account under which a bank extends credit up to a maximum amount (the overdraft limit) and against which the customer can make withdrawals. Interest is charged on the fluctuating daily balance.
Owner occupier – Home loan-seekers who intend to actually live in and use the home they are purchasing.
Package home loans – Home loans that include other accounts with the same financial institution, such as credit cards and transaction accounts.
Portability – Moving your home loan from one property to another.
Pre-approval – An initial approval process that provides an estimate of how much someone can borrow before they find a property, based on information they provide to the bank.
Principle repayment – The money that goes towards repaying the original loan amount, rather than interest on the loan.
RBA cash rate – The overnight interest rate that the Reserve Bank of Australia offers institutions to settle-up on inter-bank transactions, which in turn influenced the interest rate that banks give each other.
Redraw Facility – A loan feature that enables the borrower to withdraw funds they’ve already paid, usually this is a condition based on if they are far enough ahead on loan payments. This is not available on all loans.
Refinancing – Paying off an existing loan and establishing a new one.
Repayment holiday – A period of no payments which the borrower may be able to apply for if they are ahead on their payments.
Reverse Mortgage – Usually for older home owners who have already paid off their home loans. Allows such a person to borrow against the value of their home without having to sell the property. Typically, repayments are not made until after the borrower’s death, at which point the interest and fees are collected from the borrower’s estate.
Revolving Line of Credit (Home equity loan) – Gives a line of credit that is secured around the value of your home. Allows you to use the funds for other purposes, such as the purchase of a second property or other investments. These generally incur a higher interest rate than a standard variable rate loan.
Security - A right of a lender against the real property or other assets of a borrower to guarantee or secure the repayment of a loan.
Settlement date – The date on which documentation for the transfer of ownership of property from the seller to the buyer takes place upon finalisation of the purchase price. It is also usually the date on which the buyer assumes possession.
Split Loans – Home loans in which a predetermined portion of the loan is locked in at a fixed interest rate and the rest comes with a variable rate of interest.
Switch to fixed interest rate fee - A fee charged to cover or partially cover the lender’s internal costs of changing the loan from a variable rate to a fixed rate.
Switching – changing from one product to another (eg. Switching from a fixed rate to a variable rate with the same financial institution).
Upfront Fee - Fee paid up front to set up a loan, this can also sometimes be called a setup fee or application fee.
Variable Rate Home Loan– A home loan interest rate that fluctuates according to the official cash rate set by the Reserve Bank of Australia. The rate can go up or down over time, varying your repayments. These loans allow for more flexibility and options.
Vendor Statement – A statement issued by the seller to the buyer detailing substantial details regarding the property in question.
First Home Buyers
Whether it’s a house, a unit, a duplex or a penthouse, getting into your first home is exciting – and downloading CANSTAR’s Home Buying Guide is a great place to start learning about many of the financial things you’ll need to think about.
First Home Buyer Grants
As a first home buyer, you need to be aware of what’s on offer with regards to government incentives and how they can benefit your cause. Also be aware though that these schemes are subject to change; you’ll need to keep abreast of what’s happening in your state.
You can find out what’s on the table from state and territory governments around the country.
New South Wales – http://www.osr.nsw.gov.au/grants
Australian Capital Territory http://www.revenue.act.gov.au/home-buyer-assistance/first-home-owner-grant
Queensland – https://greatstartgrant.osr.qld.gov.au/
Western Australia – http://www.finance.wa.gov.au/cms/content.aspx?id=344
South Australia – http://www.revenuesa.sa.gov.au/
Tasmania – http://www.sro.tas.gov.au/
Northern Territory - http://www.treasury.nt.gov.au/TaxesRoyaltiesAndGrants/Pages/default.aspx
First Home Buyer Articles
Some useful articles for first home buyers are below.
As the size of your household expands, the size of your house may need to expand as well. Should you renovate the place you’re in, or sell and start again? Perhaps you could even keep the place you currently have, as an investment property, and buy somewhere else to live. There are plenty of things to think about, and some useful articles for upsizers are below.
Whether it’s to renovate, to free up equity for investment or simply to move to a better-value home loan, there are many reasons for refinancing. Some useful articles for those looking to refinance their home loan are below.
Property is a tax-favoured form of investment in Australia, and it’s popular! Some useful articles for property investors are below.
Sometimes it’s nice to start with a clean palate and create the home of your breams from scratch. Some useful articles for those building a home are below.
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