For most of us, taking out a home loan is likely to be one of the most important financial decisions you’ll ever make. It’s a long-term commitment. Even what might seem like small differences in the terms, conditions and features of loans offered by the different lenders can make a big difference to your overall goals, repayments and financial position in the long run.
In this article, we’ll explain how to find the best home loan to suit your specific needs.
How much deposit do I need?
Different lenders have different maximum loan-to-value ratio (LVR) ratio’s and policies. The LVR ratio determines the maximum loan amount (as a % of the overall purchase price) the lender will provide you.
Some lenders may offer an LVR of 100%, but to compensate for this higher risk they will inevitably charge you a higher interest rate and/or charge additional fees.
Some lenders may also have different LVR policies depending on factors such as:
What are the most important home loan features?
The interest rate on a home loan is obviously an important consideration, but it shouldn’t be your only one, nor should you look at it in isolation from other loan features.
If a loan has a very low advertised interest rate, it is likely to have fewer features and higher associated fees.
On the other hand, a loan with a higher interest rate or associated fees may have a lot of flexible features and benefits attached to it. These features may (or may not) be beneficial for your situation, either now or in the future.
It is important to consider a home loan as a complete package and to choose the one that is most appropriate for your individual circumstances. Ideally, a home loan needs to be flexible because your situation may change over time.
For example, some lenders may offer any or all of the following features that may be beneficial for you:
Portability - This allows you to transfer your loan from one property to another if you move house before you pay off your mortgage.
An offset account - With an offset account, interest you earn on this account is offset against your home loan balance, reducing the overall interest payable.
Extra repayments - Being able to make extra loan repayments allows you to pay off your loan sooner.
Redraw facility - This allows you to withdraw any additional principal repayments you have made, at a later stage if you need to.
Split loan - The ability to split the loan between both fixed and variable interest rates enables you to make the most of market conditions.
What is a comparison interest rate?
By law, lenders have to display two interest rates for their loans – a nominal or advertised rate and a comparison rate. The advertised rate is lower, but the higher comparison rate is a more accurate indicator of the total cost of the loan because it takes into account the impact of any associated fees and charges.
Some lenders offer lower introductory or “honeymoon” rates at the start of a home loan to attract borrowers, particularly first homebuyers. These rates only apply for a limited time.
The only accurate way to compare interest rates between lenders is to use the comparison rate.
What type of loan should I get?
There are a variety of different types of home loans available. These can be broadly categorised based on their interest rate and repayment structures. For example:
Fixed interest rate - The interest rate is fixed (doesn’t move), providing you with the security of knowing what your repayments will be during the fixed period.
Variable interest rate - If market interest rates increase, so does the rate on the home loan, and vice versa.
Split - A combination of fixed and variable interest rates applied to different loan amounts.
Principal and interest - You make repayments on both the principal and the interest with the aim of eventually paying off the entire loan.
Interest-only - You only repay the loan interest, not the principal. This may be appropriate for investment property loans where your goals are capital growth and negative gearing.
Term - The term of a home loan ranges from 10 – 40 years depending on the lender.
What home loan fees might I have to pay?
Depending on the loan and lending institution’s policies, you may be required to pay any or all of the following fees:
An application fee
A property valuation fee
Lenders Mortgage Insurance
Ongoing account-keeping fees
An annual fee
An early settlement fee
At Tomorrow Finance, we can help answer all of your home loan related questions and find the best possible loan for your specific circumstances.
As Australia’s leading home loan comparison and referral service, we are committed to helping Australians find the right home loan. There’s no obligation and our service is 100% free.
To speak with the experts from Tomorrow Finance phone 1300 754 562 or enquire online.Back « 4 Typical Misconceptions About Home Loans
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