There's more to home loans than interest rates
Borrowers who look beyond the interest rate horizon when choosing their home loan can benefit in the long run.
The rate usually captures borrowers’ attention when hunting for the best deal, but it shouldn’t blind them to the many aspects worth focusing on when weighing up loan options.
Consumers often think they’re home and hosed when they’ve found a loan with a competitive interest rate. What lies beneath should be paid just as much attention, such as other features needed now or in future, the fees – some of which may go unnoticed until the mortgage is in full swing - and the quality of service.
Anticipating your needs well into the future isn’t easy, but starting out with a sense of features you’re likely to want in the years to come can save much time and hassle.
These factors will help ensure borrowers settle in for a comfortable home loan journey.
The features worth considering when choosing a loan include:
Fixed or variable rate: Borrowers needing certainty over repayments might consider a fixed-rate loan, however this may not offer all the features needed, such as the ability to contribute extra payments and redraw them or use an offset account. The loan could also cost more in the long term, especially if, during the fixed term, rates fall. It depends what the market does and how the borrower feels about strapping into the rate rollercoaster. Splitting the loan amount across part fixed/part variable may be a good compromise for those seeking some stability along with flexibility.
Loan redraw facility: Having a redraw facility allows income and/or extra repayments to be put into the loan account, and withdrawn when needed. Rather than earning interest in some kind of savings account, which is taxable, the funds drop the principal loan amount, reducing the interest owed on it. This does take budgeting discipline.
Loan fees: There are many kinds of loan fees borrowers may incur, including application fees, monthly account fees, redraw fees, additional repayments fees, rate lock fees and break fees. A qualified mortgage broker can provide a full list of features and fees that home loans have.
Choice of lender: It’s best to first shop around rather than going directly to a lender you already know. Australian borrowers have access to an extensive range of safe lenders, ranging from big banks through to smaller credit unions, building societies, non-bank lenders and others. Lesser known lenders also offer competitive deals; looking at a complete set of options is a clever move.
Loan term: The length of a loan’s term impacts the repayment amount and interest paid over its lifetime. For example, if you borrow $500,000 at 7% over 30 years, principal and interest repayments are $3,327 per month. Total loan costs are $1,197,544 and the interest component is $697,544. That same loan paid out over 25 years, sees monthly repayments $207 higher but equates to a saving of $137,375 in interest. Handy online loan calculators provide such insights.
Loan top up: It helps to think longer term about loan features that may be handy down the track, such as a loan top-up feature. This allows you to increase the home loan’s credit limit to fund, say, a renovation. This is commonly used by those who want to access built up equity in their property.
Kristy Sheppard is senior corporate affairs manager of Mortgage Choice.
