8 things to consider when comparing home loans
There are dozens of home loan providers offering a wide range of products, all with different interest rates, features and fees. The sheer depth of choice can be overwhelming – but finding the best home loan deal for you simply comes down to asking the right questions.
Remember, it’s not all just about the interest rate. Some home loans might have a lower interest rate but higher administration fees, potentially offering less value than one with a higher rate but lower fees.
And pay attention to the features of each home loan. You’ll need to ensure the home loan you choose helps you achieve your financial goals without charging you for features you won’t use.
Here are the key things to consider when comparing home loans.
1. Do you need fixed repayments?
Note whether the loan offers a fixed or variable interest rate, and consider the five-year cost of the loan. If opting for a fixed rate loan, compare the introduction, year-one and year-two rates. And assess each lender’s comparison rate – the ‘true’ interest rate paid by the consumer– to ensure you get the best deal.
2. What is your LVR?
Your Loan to Value Ratio (LVR) is the total amount of your loan compared to the value of the house. For example, if you want to purchase a property worth $450,000 and can provide a $100,000 deposit, you’ll need to borrow $350,000. That means your LVR will be 77 per cent, so you’ll be borrowing 77 per cent of the value of the home.
The higher your LVR, the greater risk you represent as a borrower. You can reduce your LVR by increasing your deposit or paying lenders mortgage insurance (LMI) to help secure a loan with an LVR greater than 80 per cent.
3. Do you need to access future funds?
A redraw facility allows you to borrow back extra money you’ve paid back on the loan. Some lenders impose a redraw fee, so compare policies to make sure you don’t get hit with an unexpected bill.
4. Will you want to move home?
Loan portability allows you to keep the same home loan terms when buying a new property. This saves you the hassle of refinancing your loan or applying for a new loan when you want to sell your home and buy a new one. Remember that some lenders charge a portability fee.
5. Do you want to reduce your interest charges?
Some home loans offer an offset account option, which allows you to use your savings to reduce the interest charges on your home loan. You still have access to your money, but the interest earned on your offset account is used to pay off some of the interest on your home loan. A 100 per cent offset means that the interest you earn is the same as the interest you are charged.
6. Can you afford the fees?
You’ll need to pay certain account fees on top of your mortgage repayments and these can vary widely between lenders. Start by comparing application, valuation, legal and settlement fees associated with the home loans you’re considering, then look at any other exit or administration fees that could affect the overall cost of the loan.
Most lenders now waive annual service fees, but you may need to pay lenders mortgage insurance (LMI) – usually for loans with an LVR greater than 80 per cent.
7. How much can you borrow?
Home loan providers have different lending policies, which means your borrowing capacity may vary between lenders. Once you’ve put together a short list of potential home loan products, contact the lenders to find out how much each will let you borrow.
8. Are you buying an investment property?
Most lenders require you to specify whether you’re purchasing a property to live in or to use as an investment. Investment home loans generally come with a higher interest rate and require a higher LVR – which means you may have to provide a larger deposit.
Looking for a home loan to suit your needs and budget? Start comparing home loans from all the major Australian lenders now, or narrow down your options with our handy home loan comparison calculator.