Unless you’re a mortgage broker or you work for a bank or other lender, you may not have a huge scope of knowledge about what to look for in a home loan.
But finding the right type of home loan for your situation might be simpler than you think.
Like some of the tastiest dishes in the world, a delicious ‘mortgage parfait’ usually requires a few key ingredients, with other ingredients available as optional extras.
1. A great interest rate
A low interest rate is often the first thing you’ll look for in a home loan. And with Australia’s cash rate at an all-time low, this key ingredient is ripe for the picking.
So how low can you go?
At the time of writing, there are currently plenty of great deals on Canstar’s database, with many home loan lenders offering advertised rates of less than 4.00% p.a. (comparison rates vary, read the comparison rate warning) for either variable interest rates or fixed interest rates.
Here are some low-rate examples of variable rate home loans available for owner occupiers living in NSW, with home loans on our database at the time of writing that have advertised rates of less than 4.00% p.a. , with links direct to the provider’s website (comparison rates vary). Please note that this table has been formulated based on a $600,000 loan, repaying Principal and Interest, with an 80%LVR, sorted by comparison rate (lowest to highest).:
Chef’s tip: When judging a home loan on its interest rate, you should always refer to the comparison rate, which takes into account the overall cost of a loan including its fees and charges. The comparison rate will give you a better estimate of how expensive a loan will be compared to others. By law, lending institutions are required to display their comparison rate alongside their advertised rate, so you should have no problems finding it.
2. As large a deposit as you can manage
This is one you’ll have to grow on your own, but there are a number of money sources you can put towards a deposit, including savings, the First Home Owners Grant for first home buyers, help from a guarantor (such as a generous relative), and more.
So, how much deposit do most borrowers aim for?
Aiming for a deposit of at least 20% of the property’s purchase price before you apply for a home loan is a sensible strategy, and you may want to save more to cover the upfront costs of buying a home. Here’s why a 20% deposit can be helpful in certain circumstances:
- Borrowers may be able to avoid having to pay Lenders Mortgage Insurance (LMI) if they have a deposit of 20% or more. (LMI is payable by the borrower to the lender to protect the lender from the risk of potential financial losses if a borrower with a low deposit defaults on their loan.)
- Borrowers may be able to negotiate a better interest rate from the bank if they have a larger deposit, because they represent a lower investment risk to the lender – as opposed to borrowers who are only put down the bare minimum deposit of 5%, for example.
3. Your favourite rate flavour: vanilla variable, chocolate fixed, or banana split
Rate flavour comes down to personal preference and financial strategy, but your palate may change as lenders across the country switch between rate-cutting and rate-hiking season.
Many homeowners are also going for a mixture of those two flavours, with a split rate home loan, to utilise the benefits of both variable and fixed.
No matter what the interest rate is, it’s important to consider the pros and cons of each flavour to determine which is best for your setting.
Chef’s tip: Many finance experts and economists believe Australia’s interest rates may have bottomed out – predicting that the Reserve Bank of Australia (RBA) may start raising the cash rate in 2018. If they’re correct, taking out a fixed rate home loan now may save you money in the long term.
What is a fixed rate loan?
A fixed rate loan has the advantage of providing stability and being able to have a set budget by knowing what your repayments will be every month for a set number of years.
However, the inflexibility of a fixed rate loan means that you will be locked into paying that interest rate for a certain period of time, potentially missing out on lower rates if variable interest rates get cut.
As always, there may be fees that apply to a fixed rate loan, so be sure to check the comparison rate of home loan products, not just the current advertised rate.
The table below shows some of the 3-year fixed rates available for owner occupiers living in NSW, with home loans on our database at the time of writing, sorted by current rate (lowest to highest). Please note that this table has been formulated based on a $600,000 loan, repaying both principal and interest, with links direct to the providers website:
What is a variable rate loan?
Unlike a fixed rate home loan, the interest you pay with a variable rate can fluctuate up and down at any time.
Generally, institutions are expected to move their variable rates in line with the cash rate, although it’s quite common for lenders to raise their rate despite no cash rate movement, as we’ve seen quite recently.
Monthly repayments for a variable rate loan will change as the interest rate on that loan changes.
For instance, here is an example of the difference a hypothetical change in interest rate could make to your repayments of a $350,000 home loan over a 25-year loan term:
|Loan Amount||Monthly Repayment at 4.00% p.a.||Monthly Repayment at 4.50% p.a.||Monthly Repayment at 5.00% p.a.|
Source: Canstar Repayment Calculator
As shown above, a small interest rate hike can add hundreds of dollars per month to your repayments – and that adds up over time.
Test this out with our mortgage repayments calculator.
What is a split rate loan facility?
Splitting your home loan is one option for people who want to enjoy the benefits of both variable rates and fixed rates at the same time. In a split loan, you are splitting the home loan into two separate loans charged at different rates, with some lenders allowing you to split your loan in various ways.
Typically, a part of the balance on your loan will be charged at a fixed interest rate for a certain period of time (the fixed loan term), while the rest of the loan is charged at a variable interest rate. When that fixed rate term ends, the entire loan balance is switched to a variable rate loan product unless another fixed term loan is selected.
4. Minimal fees
Too much of the ‘fees’ ingredient will spoil the mortgage, but unfortunately you cannot have a loan without them.
Your home loan’s fees should be very transparent, so make sure you seek out a supplier that’s clear and upfront about the charges.
Such fees could include:
- Home loan application fee, which is a once-off payment you make to the lender for setting up your home loan (also known as an establishment fee, up-front fees, start-up fees, or set-up fees).
- Ongoing fees that could be charged to you on a monthly or yearly basis for administering your loan.
- Home loan early exit fee (also known as early termination fee, deferred establishment fee, deferred application fee, or early discharge fee), which could potentially cost you a lot of money. This fee may be charged if you pay out your home loan within a specified period (e.g. within the first 5 years).
- Home loan discharge fee (also known as termination fees or settlement fees), which may be charged to you upon full repayment of your mortgage.
- Lender’s mortgage insurance (LMI), which as explained above, could see you paying large fees to your lending institution if you have a low deposit, or no deposit.
- Late repayment fee or default fee could be charged if you fail to make the required repayments on your home loan.
- Break fees only apply to fixed rate home loans and are penalty fees charged if the borrower decides to end a fixed rate loan contract (by switching to a new loan) before the fixed term is due to expire.
- Redraw fee, which is charged if you choose to use a redraw facility to withdraw any extra repayments you have made towards your loan.
- Account-keeping fees may apply to a mortgage offset account attached to a home loan. This is not technically a home loan fee, but it’s a fee associated with having a home loan with a mortgage offset arrangement.
Fees and charges may change over the period your loan, and different lenders will charge different fees. Be sure to always check the product disclosure statement (PDS), key facts sheets, and the latest information from your lender to be aware of any applicable fees to your loan or a loan you are considering.
5. Features to taste
While you can grab a basic bare-bones variable loan on the cheap, the best mortgages are often seasoned with features to suit your taste.
These additives can be great help for your budget or your lifestyle – and depending on your situation, some of them can possibly even save you money over the long term.
Here are few feature condiments to consider:
A mortgage offset account is a savings account or transaction account that is linked to your home loan. The money in your account is ‘offset’ daily against the loan balance, meaning you do not pay interest on the full balance of your loan.
This can be a very handy feature to consider, because you can effectively cut years and thousands of dollars from your home loan.
For example, you might have a $400,000 loan and $20,000 in your offset account. Thanks to your offset account, you would hypothetically only be charged interest against $380,000 instead of the full $400,000 loan balance.
Redraw facilities are a feature attached to home loans that allow account holders to withdraw additional repayments they have already contributed to their loan. The balance of a redraw facility consists of any extra loan repayments you have already made (above and beyond your usual regular monthly repayments).
Differing from an offset account, the money in a redraw facility, while accessible, is not same-day at call. As we’ve discussed above, there may also be a redraw fee associated with using the facility to redraw money from your loan.
Extra loan repayments
Making extra loan repayments shortens your loan term and means you pay less in interest over the long run, so it’s definitely worth checking to see if your home loan provider offers this feature.
You can use Canstar’s home loan extra repayments calculator to work out how different sizes of extra repayment could help save money on your loan.
6. Combine ingredients using the Canstar processor
Canstar’s home loans comparison processor has helped thousands of everyday Australians find the right mortgages to suit their budgetary digestive needs and their personal taste preferences.
A feat of technical engineering and research, the Canstar processor’s combination of filters and dynamic sort functions allows borrowers of different types (first home buyers, refinancers, builders, investors) to easily combine the key mortgage ingredients to generate a few wonderful servings of award-winning and 5-star rated home loans.