Home Loan Comparison in Australia
Comparing home loans is no easy feat. There are all kinds of options available for your mortgage, but not all of them will be right for you. The goal is to find the best mortgage at the cheapest rate, and this article dives into all the factors that can affect the loan process. Read our summary to learn how to properly compare home loans in Australia so that you can afford your dream property purchase.
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Contents
What is a home loan or home mortgage?
A home loan, also called a mortgage, is a sum of money borrowed to pay for a property. Most buyers pay a deposit between 5 to 20% of the property value, then borrow the remainder and pay it off in installments over 25 or 30 years. Over the life of the loan, you’ll pay back the principal (amount initially borrowed) as well as loan interest charged by the bank lender.
Types of home loans
The first step to being an informed shopper is learning the most popular kinds of mortgage arrangements. This will assist you with comparing home loans and understanding the main features of each one.
Basic loans
These are simple loans with minimal features and lower interest rates. They usually come with fees and restrictions. Basic loans are best if you have a straightforward financial situation and don’t need custom options.
Standard loans
With these loans, you can do things like redrawing money that you’ve already paid back, or splitting your interest rate into part-fixed and part-variable. You can also have an offset account to reduce your interest costs.
Low deposit home loans
These home loans enable buyers to buy a house without paying a major deposit of 20% or more. They make homes more accessible, but usually require Lenders Mortgage Insurance and higher interest rates to protect the lender.
Rent-to-own loans
These loans are meant to help buyers get out of the rent cycle and accelerate a path towards home ownership. Under this setup, parts of your rent payments are applied towards a loan deposit for a future home purchase.
Construction loans
These unique loans grant you funds to build your future house. The benefit here is that you only borrow as much money as you need during the construction process, and you only pay interest on the actual amount borrowed.
Home loan packages
These low-interest loans usually come with a free transaction account and a credit card with no annual fees. Be aware that some have package fees of up to $400 per year, so make sure that it makes sense for your needs.
Are you buying a home as an owner-occupier or as an investor?
When comparing home loans in Australia, it is clear that loans look different based on whether you plan to live in the property yourself or buy it as an investment.
Owner-occupier home loans
These loans are intended for those who want to buy or build a house as their own residence. As you compare home loan interest rates, you’ll see that these loans tend to be cheaper than investor loans.
Investor home loans
Opposite to owner-occupier loans, these are geared towards buyers who want the house as an extra financial asset in their portfolio. Investors may want to rent out the property and/or re-sell it at a profit.
Both of these loan types can have fixed, variable, or split interest rates. They can also offer either a principal & interest repayment or an interest-only repayment setup.
What to look at when comparing home loans
There are several key aspects of a home mortgage to consider before selecting one. While it’s obviously critical to compare home loan rates, you also have to think about repayment types, loan features, and any additional fees. By looking at these factors, you will be comparing home loans in a savvy way.
Interest rates
The main takeaway here is that the lower your rate, the lower your repayments. The best way to compare home loan interest rates is actually to look at something called the comparison rate, which accounts for extra fees and charges on the loan. These are the three main kinds of interest rates:
Fixed rate: This rate will lock in for a period of one to five years. After the fixed term, the rate goes to a standard variable rate, or you can re-fix the rate. These rates have fewer features but have the benefit of extra stability.
Variable rate: This rate will fluctuate based on the housing market and is often tied to the Reserve Bank cash rate. These loans are less predictable and can be pricier, but they usually have extra features like offset accounts and redraw facilities.
Split rate: This is a “best of both worlds” setup where part of the rate is fixed and the other part is variable. This way you get some of the stability of a fixed rate, while still taking advantage of some opportune savings with a low variable rate.
Repayment types
Given the length of time you’ll be repaying a home loan for, you definitely want to check out the options for how exactly you’ll return the amount owed. The goal is to find the option that matches your budget needs.
Principal & interest repayments: With this option, your payments go both towards the principal loan amount as well as the interest accumulated.
Interest-only repayments: Here, your payments go entirely towards the interest during the early period of the loan, and then get applied to the principal.
Features
Some mortgages will have added flexibility by way of custom features. This is a helpful thing to look for when comparing home loans, since they can be a major way to save money.
Offset account: This is a transaction account connected to your home loan. Whatever sum is in your account gets subtracted from the loan balance. Interest only builds on the remaining balance instead of the entire loan total.
Extra repayments: If you have some extra money on hand, you could put it towards the loan balance to help you pay off the loan faster. A sooner end date means paying less interest. Most variable rate loans allow this.
Redraw facility: If your loan allows extra repayments, it may also allow you to re-borrow those funds and get them back for your immediate use. There might be a redraw fee or a limit on the total you can borrow back.
Special promotions: Certain lenders will have unique offers for particular customer groups. For instance, medical professionals can sometimes get discounted rates since they are seen as stable earners.
Fees
When looking at the extra expenses surrounding a loan, some customers only compare home loan rates and stop there. However, it’s important to pay attention to the fees as well.
Application fees: These are charged when you initially apply for the loan.
Ongoing fees: These come on a regular basis for keeping the loan open.
Valuation fees: These cover the lender’s cost for having the property valued.
Discharge fees: These apply when the loan is paid off or refinanced.
How much should I save for a home loan deposit?
Once you have determined a general price range for your home purchase, you will be able to start saving up for a deposit based on the Loan-to-Value Ratio (LVR). The LVR represents the portion of the home price that you are borrowing. The standard amount is a 20% deposit, meaning you would borrow 80% of the value for an LVR of 80%.
If a 20% deposit is too steep, many lenders will grant loans with as little as 5% paid upfront, but they will likely require you to pay for Lenders Mortgage Insurance (LMI). This could cost up to an additional 3% of the loan amount, and is either a one-time upfront cost or gets factored into the repayments.
Further Readings on Home Loans
There’s a lot more to the world of home loans than you might know, even if you’re an experienced home buyer. Our purpose is to provide you with a variety of home financing resources. These include universal guides and tools for home finance as well as explanations of specialty loan programs. Whatever your financial situation, MNY can help you get connected with the best home loans.
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Comparing home loans FAQ
Bringing it all together: how to do a home loan comparison
Given the importance of a home purchase, it’s essential that you enter the real estate arena armed with up-to-date knowledge on home loans. Once you have a handle on the loan type that suits your needs, you can dig into the interest rates, fees, and special features that will help sweeten the deal. By the end of the process, you will know that you settled for nothing less than the best.