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Choosing The Best Home Loan For Me

Kevin Gomer
30 Apr 2016




Researching home loan types: Checklist to consider

Choosing a home loan is a big decision and an extremely individual choice. The best home loan for a friend or neighbour is not necessarily the best home loan for you and your financial situation.

There are a lot of factors to consider when choosing the right home loan – here we take you through them and what they mean.

Types of Home Loans

There are two main types of home loan: fixed rate home loans and variable rate home loans.

A fixed rate mortgage has an interest rate that does not change throughout the term of the loan. A variable rate home loan, on the other hand, will have an interest rate that changes depending on the market.

Whether you will be better off with a fixed rate home loan or a variable rate home loan depends on the current average rate when you set up your loan, and how well you can guess how that rate might change over time. The lower the rate, the less you will end up paying on your mortgage.

So, if rates are low when you get your loan, you may be better off choosing a fixed rate loan. That means that even when rates rise again, the rate on your loan will remain the same. However, if rates are high at the time you get a loan, you might want to choose a variable rate home loan, so that when the market changes, you will get the full benefit (at least until they rise again).

Fixed Home Loans are good for…

Those who can afford a slightly higher monthly payment, or those who don’t need as large of a home loan. A fixed rate home loan is also good for those who plan to stay in their home long term, as the monthly payments remain the same throughout the duration of the loan.

Variable Home Loans are good for…

Variable home loans offer slightly lower payments at the beginning of the loan, but those payments may rise when the interest rate changes. If you think that you are likely to sell your home before the end of your mortgage, you plan to refinance prior to the end of your loan, your income will increase before you have paid for your home loan, or if you are guessing that interest rates will remain the same or decrease rather than increasing, variable rate mortgages may be a better option for you.

Fixed/Variable Split Home Loans

Depending on the lender, it may be possible to get a fixed/variable spilt, where a portion of your home loan is on a fixed rate while the other portion is variable. This can offer the benefit of a fixed mortgage for a set term at the beginning, and then the rate changes following the fixed term until the loan has been paid off. If you can get a low rate to begin with and only plan to be in your home for the length of the fixed portion of the loan, this may be a good option.

Deposit considerations

Most lenders will require you to be able to pay a lump sum payment upfront to the seller of the home – known as the deposit – which is calculated as a percentage of the total value of the home you wish to purchase. A minimum deposit is usually 10 percent but some may be higher or lower. You need to consider how much deposit you can afford, and what that means for your mortgage and borrowing power.

Loan to Value Ratio (LVR)

The loan to value ratio is the percentage of the value of the property that the lending institution is willing to lend you.

For example if you’re looking to buy a home for $200,000 and the lender is offering you an LVR of 80% it means they will only lend you $160,000, so you will need to be able to pay a deposit of $40,000.

Loan Mortgage Insurance (LMI)

In Australia, loan mortgage insurance is usually necessary if you do not have a deposit worth at least 20 percent of the value of the home. This protects the lender from financial loss if you are unable to repay your home loan, and you need to take the cost of this insurance into consideration when choosing the right lender or loan package for you.

Offset accounts

An offset account is a savings account where you can deposit money and withdraw funds as you please, but it is connected to your home loan. Instead of receiving interest on the offset account, the interest rate on your home loan is reduced. You won’t receive any additions to your taxable income because you don’t actually earn any money, so it also provides tax benefits.

Redraw facility & fees

When you pay extra money beyond the minimum payment required on your home loan, you have the potential to pay your loan off early, saving on interest. A redraw facility allows you to withdraw the additional money that you paid towards your loan if you need to, with limited penalties.

Additional payment facility

If you are just paying the minimum monthly repayment on your home loan you will likely only be keeping up with paying off the accumulating interest for the first few years, and not any of the principal sum of the loan. But in order to shave years off your mortgage you need to be chipping into the principal sum as early and as much as possible, by making additional payments and lump sums when it is financially viable for you. In that case you need to choose a home loan that allows additional payments.

Application fees

In order to determine whether you are eligible for a home loan, how much you are eligible for and to cover the paperwork and time required to process your loan, a lender may charge you an application fee. Remember to compare these fees when shopping around for the loan that’s right for you, and remember you or your broker can try to negotiate the application fee so that you get either a discount or no fee.

Valuation fees

In order to determine the value of the property you wish to purchase, the lender may charge a valuation fee. Valuing the home should be the last step, after the lender has verified your personal finances and income, so that you don’t waste money on a valuation you don’t need if you aren’t approved.

Accounting fees

Costs incurred due to initiating a loan, acquiring a loan, or the initial cost of the loan will likely fall on you.

Annual fees

If your loan comes with annual fees, it may affect how quickly you are able to pay your loan off. Compare the rates from each lender and look for loans with minimal or no annual or monthly fee.

Portable loan vs. discharge & establishment fees for moving home

Having a portable loan allows you to transfer your home loan from an existing property to a new one, should you choose to sell your current home and purchase a new one. It allows you to skip paying establishment or application fees on a new loan.

If your loan is not portable, you’d have to sell your current home, pay off the mortgage, and apply for a new loan, with new fees for your new home.

Interest Rate

What is the advertised rate?

Look through publications like newspaper and magazine advertisements for home loans to find the current advertised interest rate for home loans.

What is the comparison rate?

Lenders and creditors will provide a comparison rate in addition to their advertised rate. It should include average monthly payments, fees and charges that you might incur, and the interest rate.

What is a honeymoon rate?

Some lenders offer ‘honeymoon rates’ to attract new customers. The honeymoon rate is a short period at the beginning of your loan (usually a year) where you pay a lower interest rate. However, be mindful that this will increase after the honeymoon period expires, so take the long-term view when comparing rates.

How can Nicheliving Home Loans help you choose the right home loan for you?

Are you looking for a home loan in the Perth area? Clearly there is a lot to consider when finding the right home mortgage for you. Luckily Nicheliving Home Loans are here to help! We offer free, no-obligation home loan advice, and we’re based centrally in Perth. Contact us today to discuss your situation and find the best loan for you!