How do you choose a mortgage? Do you look for the cheapest interest rates, the most useful features, or the most convenient lender? How do you get past the financial jargon and confusing details to find a home loan that appeals to you?
RateCity puts a wide variety of mortgage offers from a range of different banks and non-bank lenders all in one place, so you can view their details side by side and get the information you need to more easily make your decision.
Looking at interest rates – variable or fixed rate?
When comparing the different home loan options available to you, it’s almost always worth taking a long look at the interest rates on offer. The lower the interest rate, the less the lender will charge you with each mortgage repayment.
Many mortgages have variable interest rates, where the amount of interest a lender charges is based on the national cash rate, as set by the Reserve Bank of Australia (RBA). Depending on the RBA’s decisions, your lender’s interest rate could rise or fall, bringing your mortgage repayments up or down with it. While falling rates could have you saving money, rising rates could throw out your budget and put you at greater risk of mortgage stress.
Certain lenders allow you to fix the interest rate on your home loan for several years, so you can know exactly how much your mortgage repayments will cost, and keep your household budget simple. However, you won’t benefit from savings if interest rates fall, and you may lose access to certain flexible features that are more typically bundled with variable rate loans.
If you’re not sure whether a fixed or variable interest rate would best suit your finances, another option to consider is a split rate home loan, where you pay a variable rate of interest on a percentage of your loan, and a fixed rate on the remainder. This way, your repayments are unlikely to become unaffordable if rates rise, but you’ll still enjoy some savings when rates fall.
Looking at your deposit
Most lenders require you to pay a deposit on a home loan to provide financial security. The exact amount varies by lender, but 20% of the property value is common. But even if you can’t afford a full deposit, there are still options available.
Some lenders may be able to provide a mortgage with a higher Loan to Value Ratio (LVR), where you pay a smaller deposit up front and instead borrow a greater percentage of the home’s value. Exercising this option may require the borrower to pay for Lender’s Mortgage Insurance (LMI) to cover the lender in case the borrower defaults.
To avoid having to pay LMI, a borrower may be able to ask a family member to serve as a Guarantor for their loan, using the equity in the guarantor’s property in lieu of a deposit on the borrower’s loan. This option can put the guarantor’s credit at risk, so due care should be taken when exercising this option.
Short or long term mortgages?
The length of your home loan’s term can make a significant impact on your mortgage repayments. Many home loans start with a term of 25 or 30 years, though it is possible to opt for shorter or longer terms.
Shorter-term mortgages can have your property paid off more quickly, over a smaller number of repayments. However, as each of these repayments will be for a larger percentage of the loan’s principal, they may prove to be less affordable from month to month.
On the other hand, stretching out your home loan for a longer term can help to lower your monthly repayments, making them a bit more affordable. However, the larger number of repayments in a longer loan term also means a larger number of interest payments. Over the course of a longer-term mortgage, you may ultimately pay more interest in total than you would by opting for a shorter-term loan.
What is the deal with Comparison Rates?
Most lenders don’t just charge interest on their home loans – they charge fees as well. A home loan with a low interest rate and high fees can sometimes prove more expensive in total than a mortgage with a higher interest rate and lower fees.
With this in mind, lenders are required to display Comparison Rates alongside their advertised interest rates. These percentage figures combine each loan’s advertised interest rate with its standard fees and charges, so you can make a more accurate estimation of how much different loans may ultimately cost you.
It’s important to keep in mind that even a loan’s comparison rate may not take every extra cost into account, such as nonstandard charges. Plus, some loans come with value-adding features that also aren’t factored into the comparison rate, so it’s usually worth considering the terms and conditions of your shortlisted home loans in detail.
Comparing offset accounts and redraw facilities
Looking to save a little money on a mortgage? Some lenders provide certain flexible features to help you make smarter use of your available finances in different ways.
An offset account is a saving or transaction account that’s also linked to your home loan, with any money deposited into this account being included when calculating interest payments on your mortgage.
If you’ve paid back $200,000 on a $500,000 loan, and have $15,000 in your offset account, then your interest repayments will be calculated as if you owed $285,000 on your home loan rather than $300,000, saving you some money.
A redraw facility can be used to withdraw any surplus balance you’ve paid onto your loan, subject to the lender’s terms and conditions. This way, you can pay extra money onto your mortgage, confident in the knowledge that you’ll have the option to access your funds again if required.
Comparing banks and non-bank lenders
A bank is often a popular choice when selecting a mortgage lender, as in many cases they can also bundle transaction and saving accounts, credit cards, and other useful features into their home loan offer. However, some banks may have fixed lending criteria, and may not be willing to adjust the terms of their home loans to better suit different financial situations.
By approaching a non-bank lender about a home loan, you may be able to enjoy a competitive interest rate, as well as more flexible loan terms that could better suit your finances. However, you may not be able to access the extra features offered by some banks, and if you take out a home loan with an online-only lender, you won’t be able to visit a branch to discuss your mortgage in person.
Low doc home loans
If you’re a sole trader, contractor, or similar part-time worker, and can’t provide a lender with the same kind of proof of income documentation as a full-time worker, you may find it more difficult to apply for a home loan. However, it is possible for these borrowers to purchase a home or investment property with the help of a Low Doc Home Loan.
As the name implies, Low Doc loans don’t require as much documentation during the loan application process, though you will still need to provide some evidence of reliable income. Also, due to the added risk to the lender, these loans tend to have higher average interest rates than other home loans.
What if you want a home loan to buy a property that hasn’t been built yet? Or what if you need a loan to afford a major structural renovation to an existing property?
A Construction Facility is a type of mortgage that’s specifically for building and renovation projects, and covers the value of the existing land or property, plus the construction costs. Unlike a more typical home loan, you don’t receive the full value of a construction loan at once, but instead draw it down in a series of stages as construction progresses. As each phase of the construction project is completed, your lender will release more money from your loan to pay your builders for the next phase, until the project is done.
It’s also common for these loans to have affordable interest-only repayments while construction is underway, until it reverts to a more typical home loan at conclusion of the project.
Compare home loans at RateCity
There is no one-size-fits-all home loan that’s ideal for any borrower in Australia. First home buyers, next home buyers, investors and refinancers all come from different financial situations, and all have different requirements for lenders to meet.
RateCity puts a diverse array of home loan options in one place, from bank and non-bank lenders. As well as comparing interest and comparison rates, you can calculate your estimated repayments and the total costs of different loan offers, and get a better idea of which home loans can save you money, and which once can offer additional value to you and your loved ones.