How to choose the best home loan
The days of just heading over to your local bank to sort out a home loan for a brick veneer on a quarter acre block are long gone. The way we live and the size of the lending industry necessitates an informed approach.
There are a myriad of different variations in home loans offered by literally hundreds of lenders. Should you have a fixed rate? Variable? Principal and interest payments? Can you even compare loan for loan?
First time buyers need to have a solid understanding of what they are being offered, and what features best suit their circumstances, and how to compare loans.
So how do you get the best home loan? Start by understanding the fundamentals.
Where you need to start
Firstly you need to understand the language and what features you are looking for. If you do not understand what comparison rate means, or what an offset account is ask your broker or lender to explain it to you, or you can read about them here.
There is no such thing as a dumb question. The more you understand the process the better you will be able to make an informed decision.
When it comes to reviewing loans do not focus on one aspect (such as low interest rate, introductory rate) but look at the entire package and how it will affect your monthly finances, your overall financial plan and whether in fact you need all those features.
Once you are familiar with the available features decide from the outset which ones are important to you.
The deposit on a home loan is a key factor in determining how much you can borrow, your capacity to repay and whether you will be asked to take out lenders mortgage insurance. Have a very clear figure in mind for the deposit and funds on hand, or a plan to get them, before you proceed.
Once you have a better understanding of what features you want, and how much deposit you have, you can move forward in looking at your home loan and what options are available.
Some features that you might consider
Extra repayments – Can be handy in reducing the loan at times when you have excess funds.
Redraw facility – Allows you to get funds back that you have paid previously as extra repayments. Having a redraw and using your mortgage to effectively store your savings can have tax advantages.
Interest only – Is generally something used by investors and generally only available for 5 years.
Offset accounts – Can offer reduction on the interest you pay. You deposit funds into the offset account and it reduces the amount of the loan that you are being charged interest for. These accounts have benefits and are tax effective as they don’t actually pay interest.
Repayment holidays – can be useful in times of financial stress. You may have just had a new baby and some loans allow you to take a holiday from repayments generally only for 6 months during a period when you may need cashflow.
Home loans and the associated documents and fees are complex. It is important that you have a clear understanding of what fees are part of the loan, the upfront fees and also the fees that may arise in the future.
In general most people stay with a home loan around 3 to 5 years. You need to understand what fees you may be up for if and when you move your loan or refinance.
Comparing home loans
Comparing home loans looks easy when you are online on one of the numerous home loan comparison sites, and they might be a good starting point, but loans with similar features can vary greatly in other areas.
Different lenders have different criteria for lending, they may require a larger deposit to loan you your funds, or a lower deposit may attract a higher interest rate. Direct comparisons can sometimes be quite difficult and confusing.
Have a checklist and work through them ensuring that
- The loan has all the features you want
- You understand all the fees
- That there is solid after sales service
- And that it works within your financial strategy
Should you use a mortgage broker?
Home loans and mortgages can be complex and very time consuming. Employing a professional can save you time and aggravation. They can assess loans for you based on your requirements and then present you with the best possible options.
Before employing a mortgage broker ensure you have researched them thoroughly and that they have access to a raft of lenders and have relationships with them. A good broker will talk you through the process and assist you in understanding what you need, help you find the best home loan, and provide service far into the future.