How to find a home loan that suits you

There’s no such thing as a one-size-fits-all mortgage. Home loans are different for everyone, because everyone is different. We all have unique jobs, income, debts, savings, relationships and families, which all play a part in choosing and paying back a home loan.

It’s therefore essential to find a home loan that makes sense for you; that way, you can comfortably pay back your mortgage over the life of your loan and avoid unnecessary financial stressors down the track.

There are many things to take into account when it comes to home loans, including the type, mortgage repayments, and features that can help you make the most of your mortgage. We get into all of these factors below, so you can figure out which ones suit you best. 

There are many types of home loans on the lending market. Here’s how some of the common types work:

The standard home loan, this is designed for borrowers who’ll be living in the property the home loan is being used to buy. Owner-occupier home loans tend to have lower interest rates than other loans, such as investment loans, as they’re being used for a property that’ll likely be your main residence for years to come, meaning you’re more likely to hang onto it.

An investment home loan is catered towards those wanting to purchase a property for investment purposes, which often entails renting it out and profiting through a rise in the property’s value. Investment home loans often have higher interest rates and stricter eligibility criteria than owner-occupier loans because investors are usually deemed riskier borrowers than those buying a place to live in.

Another type of home loan is low-doc or low documentation loan. These are designed for people who work for themselves and don’t have the typical proof of income documents such as employee payslips and pay summaries. Low-doc home loans often incur higher interest rates and fees to compensate for the more generous lending, and aren’t offered by as many mainstream lenders, unlike owner-occupier loans or investment loans.

Reverse mortgages allow people who are asset-rich but cash-poor (and usually over 60 years of age) to access the equity in their home. Having a reverse mortgage means you don’t have to make repayments while living on the property but, as with any loan, interest is charged on the amount and when you sell the home or pass away the loan must be paid in full, including interest, to the lender. According to the Australian Securities and Investments Commission (ASIC), reverse mortgages can create financial difficulties later in life, so something to think about when considering this home loan type.

A construction home loan is a mortgage you take out when you’re building a new home or majorly renovating an existing one. Unlike a standard home loan, construction home loans cover expenses during different stages of the construction process in what’s called a progressive draw-down. The payments typically occur across the deposit, base, frame, lockup, fixing, and completion stages.

As the name suggests, this is an in-between loan; it’s ideal if you’re transitioning from selling your old home and buying a new one. A bridging home loan is technically taken out on top of your current home loan, with extra money given to you to help purchase your second property while the other sells. For this reason, bridging home loans are often shorter, up to a maximum of 12 months in most cases; they also tend to come with higher interest rates than standard home loans.

If you already own a property and have paid off some or all of the mortgage, you have what is called home equity. A line-of-credit loan is borrowed against the equity of your home. For the most part, a line-of-credit loan is reusable, meaning you can borrow and repay funds up to the credit limit as much as you want.

Not so much a product but a structure, a guarantor home loan allows you to have a guarantor tied to your home loan (such as a family member) who agrees to make your repayments if you can’t. Guarantor home loans can be beneficial for low-income earners or those struggling to reach their deposit goal, as some lenders allow guarantor-backed borrowers to take out a 0 per cent deposit home loan.

Another thing to consider when it comes to home loans is the type of repayments you want to make. The majority of home loans have principal-and-interest repayments, which means you borrow money (the principal) and repay it with the interest that’s been added on top.

The alternative is interest-only repayments. In this instance, you delay repaying the loan principal for the first few years of the loan before you start chipping away at the principal amount (plus interest). While repayments are much cheaper to begin with, they’ll sharply rise when you start repaying the principal amount, and it’s important to remember that when you’re only paying interest you’re not getting yourself closer to paying off your property.

It’s important to consider the different interest rates that can be attached to your home loan, as this can make a difference to how much you pay over the life of the loan. Read on to discover the various interest options on offer.

Fixed-rate home loan

This is a locked-in interest rate that stays the same for a set period, usually between one and five years. Fixed-rate home loans can benefit borrowers by giving them the security of steady repayments, as well as giving them the opportunity to lock in a rate if they expect rates to increase in the coming months or years. At the same time, fixed home loans can disadvantage borrowers if rates continually drop; while you may be able to break the fixed component of your loan contract before the term is up, this usually incurs some sort of fee.

Variable-rate home loan

Another interest rate you can opt for on a mortgage is variable, which fluctuates with the market. If your interest rate changes a lot throughout the life of your loan, you could be paying vastly different repayments month to month; with a variable-rate home loan, you’ll also have to be comfortable with having to fork out more if interest rates rise. In terms of benefits, variable home loans are generally more flexible and can also have handy features such as making extra repayments (often at no extra cost) to help you pay off your loan sooner, as well as a decrease in costs when interest rates are lower; however, they don’t have the certainty that’s intrinsic to a fixed-rate home loan. 

Split home loan

Split home loans may offer the best of both worlds, with a blend of fixed and variable interest rates applying to part of your loan principal. When the fixed-rate period comes to a close (no more than five years after taking out the loan), you’ll revert to a variable rate for that part of the loan for the remainder of the loan term.

Not all home loans come with the same set of features. It’s important to consider the different ones available and what they do, to figure out which ones you’d like as part of your mortgage. 

Here are some common features you can find across home loans: 

• An offset account: attached to your home loan, this is a transaction account designed to reduce how much interest you pay on your mortgage
• A redraw facility: also attached to your home loan, a redraw facility allows you to access additional repayments that you've made on your home loan
• Making extra repayments or lump sum repayments to pay off your home loan sooner

getting home loan pre-approval: This is when your lender gives you conditional approval to borrow funds for your ideal property before you've even found it.

With features come fees to access them. Here are some fees you may have to pay, depending on what loan you get: 

• Application or establishment fees
• Property valuation fees
• Ongoing fees, such as annual fees
• Late payment or default fee, if you make a requirement payment after the due date
• Discharge, termination or settlement fees, for when you pay out your mortgage in full
• Break fees, if you switch loans during a fixed-rate term
• Redraw fees, if you use a redraw facility
• Account-keeping for offset account, if you have one attached to your home loan
• Lender’s mortgage insurance (LMI), if you only have a small deposit on your loan.

As you can see, there are a lot of options when it comes to home loans. If you need help deciding what home loans and accompanying features to get, you can always talk to a mortgage broker. They’ll be able to help you find the right loan for you by taking the time to understand your needs and goals, and what you can afford to borrow. Plus, mortgage brokers can apply for the loan on your behalf and manage the process all the way to settlement.