When comparing your home loan options, it's important to look at more than just the interest rate that's on offer. Here are some important factors to consider:
Introductory rates
Lenders may offer introductory variable home loan rate discounts, or honeymoon rates, as special offers to entice new borrowers onto their books. The introductory period may even include perks like fee waivers, cashback offers and more.
After a set period of time, these introductory rates will then revert to a generally higher standard variable rate. If you choose a home loan offering a low introductory rate, ensure you know not only the exact period of time of this honeymoon period, but also what the lender's standard variable rate is. This way you can consider refinancing to a new, low rate loan once this period has ended if you find the ongoing rate is too high.
Features
Variable rate home loans are more likely to come with helpful features, such as an offset account or a redraw facility. However, some lenders may charge higher rates or fees for access to these features. Carefully consider the ongoing costs of a variable rate home loan with features before you apply, as you may find that starting with a no-frills basic variable rate option is more affordable to begin with - especially for first home buyers.
You can always refinance after a few years to a home loan with features once you've built up some equity and grown your own savings and income in this time.
The size of your deposit
You’re often more likely to enjoy lower variable interest rates on your mortgage if you can afford a larger deposit on your property. This added security helps to reduce the lender’s risk. The deposit size required for a mortgage varies by lender, but 20% is often considered an ideal deposit size for nabbing a more competitive loan option.
If you can’t afford a full deposit on the property you want, there may still be home loan options available to you. Some lenders offer mortgages with a high loan to value ratio (LVR), where you pay a smaller deposit and borrow a greater percentage of the property’s value. However, your lender may require you to pay Lender’s Mortgage Insurance (LMI) to keep them protected in case you default on your loan.
Alternatively, you may be able to have a parent or other close relative serve as your guarantor, using the equity in their property to guarantee your home loan in lieu of a deposit. This option can allow you to sidestep LMI, though it may also put the guarantor’s finances at risk if you were to default.
Keep in mind that, depending on your state or territory and whether you're a first home buyer or not, you may have to pay stamp duty on your property. This can range in the tens of thousands of dollars, so factor this potential cost into your deposit budget.
How does the market look?
Variable home loan rates are subject to market fluctuation, which can affect your repayments. In fact, this reason is why you may have heard friends or family describe variable rate home loans as dangerous or risky. It's important to understand how these fluctuations might affect your budget and cash flow, and whether you could comfortably afford any potential increases in your repayments.
Before you apply for a variable rate loan, take stock of the market and what economists and experts are suggesting could happen to the cash rate. Hop on the finance news sites, or our news page, to keep up with market trends. RateCity’s summary of the latest big bank interest rate predictions could come in handy here.
