How to pick the right home loan for you

There’s no hard and fast answer when it comes to finding your ideal home loan. 

A good home loan is ultimately one that suits your personal and financial circumstances, and has all the features you need to purchase your desired property and make your repayments confidently. 

When picking a home loan, it’s important to take into account your employment and financial situation as well as your relationship and family set up, as these will all affect the amount you’ll be able to borrow as well as your repayments.

It’s important to compare home loans across different lenders, so you can narrow down your options and pinpoint your ideal mortgage, so work out what you need and then shop around until you find a lender and a loan that feels right.

There are many things to consider when it comes to home loans, including the type, repayments and features that can help you make the most of your mortgage. 

Starting off with the type of loan - there’s more than just one. In fact, there are eight commonly used loan types in the lending market. Here’s what they are and how they work.

Owner-occupier home loan

This is the standard mortgage in Australia, designed for borrowers who’ll be living in the property the home loan is being used to purchase. Owner-occupier home loans usually have lower interest rates than other loans, such as investment loans, because they’re being used for a property that’s likely to be your main dwelling for years to come, meaning you’re more likely to hang onto it.

Investment home loan

Opposite to the above, an investment home loan is catered towards people purchasing a property for investment purposes - which typically involves renting the property out and, ideally, profiting through a rise in the property’s value over time. Investment home loans often have higher interest rates and stricter eligibility criteria compared to owner-occupier loans, as investors are usually considered riskier borrowers than those buying a home purely to live in.

Construction home loan

If you’re building a new home or majorly renovating an existing one, then a construction home may be for you. Unlike a standard home loan, construction loans cover costs during different stages of the construction process in what’s called a progressive draw-down. The payments generally occur across the deposit, base, frame, lockup, fixing and completion stages.

Low-doc home loan

‘Low-doc’ or low documentation loans are intended for the self-employed, who don’t have the typical proof of income documents, such as employee payslips and pay summaries. Low-doc home loans usually come with higher interest rates and fees to compensate for relative lack of income proof on offer and aren’t offered by as many mainstream lenders, as opposed to investment loans or owner-occupier loans which are more commonplace. If you’re in this boat, it may be worth chatting to a mortgage broker who can give you advice and help you navigate the application process.

Reverse mortgage

Reverse mortgages enable asset-rich but cash-poor individuals (who are usually over 60 years of age) to access their home’s equity. 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, which is something to keep in mind when considering this home loan type.

Bridging home loan

As the name alludes to, this is an in-between loan, targeted towards those transitioning from selling their old home and buying a new one. A bridging home loan is technically taken out on top of your existing home loan, with extra money given to you to help buy 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 heftier interest rates, compared to standard home loans.

Line-of-credit home loan

If you already own a property and have paid off some or all of the mortgage, you’re considered to have home equity. With this type of loan, a line-of-credit loan is borrowed against the equity of your home. Generally speaking, a line-of-credit loan is reusable, which means you can borrow and repay funds up to the credit limit as much as you want.

Guarantor home loan

More of a structure than a product, a guarantor home loan enables you to have a guarantor tied to your home loan (such as a family member) who agrees to make your repayments if you’re unable to. Guarantor home loans can be convenient 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, which allows you to get a foot in the door where you might not otherwise be able to.

When picking a home loan, you’ll also have to think about the repayment types you’re comfortable with (or that you can afford). Most home loans have principal-and-interest repayments, meaning you borrow money (the principal) and repay it with the interest that’s been added on top.

The alternative is interest-only repayments; this is when 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 a lot cheaper to start off with, they’ll sharply rise when you begin repaying the principal amount, and it’s important to keep in mind that only paying interest isn’t getting you any closer to paying off your property.

The interest rate that’s attached to your home loan will affect how much you pay over the life of your loan, so it’s important to pick a rate that you can afford.

You’ll also need to consider the various interest rate options, including fixed, variable and split. Here’s a breakdown of each of these three types:

• A fixed-rate home loan has a locked-in interest rate that stays the same for a designated period (usually one to five years). When the term is up, you may be able to keep the fixed rate by renewing it with your lender or refinancing it with another lender.
• A variable-rate home loan is where the interest rate fluctuates with the market. Under a variable rate, your repayments can change quite a lot so you’ll need to be prepared to fork out more when interest rises.
• A split home loan is where you get the best of both worlds, with a mixture of fixed and variable interest rates on portions of your loan balance. When the fixed-rate period comes to an end (no more than five years after taking out the loan), that portion of your loan will move on to a variable rate, which will stay in place for the remainder of the loan term.

Some home loans have features to help you manage your mortgage, while others don’t. It’s essential that you consider the different features and their purpose, to work out if you want them as part of your mortgage.

Here are some common mortgage features to look out for:

• 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.
• making extra repayments or lump sum repayments to pay off your home loan sooner
• a redraw facility: tied to your home loan, a redraw facility lets you access additional repayments that you've made on your mortgage
• an offset account: also tied to your home loan, this is a transaction intended to reduce how much interest you pay on your mortgage

Most lenders charge fees for having a mortgage with them. Some charges you may have to pay as part of your home loan include:

• application or establishment fees
• property valuation fees
• ongoing fees, such as annual fees
• late payment or default fee, if you make a compulsory repayment after the due date
• early exit fee, if you repay your home loan in full and close it before the loan term ends
• 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 have a redraw facility
• account-keeping for offset accounts, if you have one attached to your loan
• lender’s mortgage insurance (LMI), if you have less than a 20 per cent deposit on your loan.

If you don’t want to spend a fortune on fees, then you’ll have to shop around at different lenders to see where you might be able to snag a deal.

It can be a bit overwhelming to pick just one home loan out of a sea of options. If you need a helping hand in picking the right home loan for you, you can always speak with a mortgage broker. By taking the time to understand your needs and goals, and what you can afford to borrow, they’ll be able to help you navigate the sea of lenders and hopefully help you land on an ideal mortgage. The added benefit of using a mortgage broker is they can also apply for the loan on your behalf and manage the process all the way to settlement, which can go a long way to alleviating what can be a time-consuming and often stressful process.