Loan Options

There are no right or wrong answers when it comes to choosing a home loan – it just has to be right for you. But you must know what all the options are before making a decision. A basic fact to keep in mind is that the more flexible the loan, the higher interest you’ll pay. A variable loan which allows you to draw against repayments or offset savings against the mortgage will have a higher rate than a basic loan.

Look Beyond the Banks

Get a feel for what’s on offer across the wide range of financial providers around these days. Credit unions, building societies, mortgage originators, community banks and boutique online or telephone banks may offer better interest rates or lower fees than the big banks because they are anxious to win new business or they are non-profit organisations. However not all loans or lenders are equal. Over 40% of Australians use a mortgage broker to assist them in evaluating which loan and which lender suits their current and future needs. So don’t be swayed by cheap rates or low fees, if the loan restricts your future borrowings or the features of the loan you want it may not be saving you money in the long run.

Things to consider when seeking finance:

New Borrowers

  • allow for higher interest rates of up to 1.5-2% more than the current variable rate, so you know you can afford the loan if the rates increase
  • consider maximising your deposit, for instance if you want to buy two properties in the next two years consider paying mortgage insurance and keeping some of your funds available for the next property purchase or as a buffer
  • ensure personal debts like credit cards and car loans are under control before committing to a property loan, for every $5000 credit card limit (not balance) your borrowing capacity is reduced by $20,000
  • Once you’ve saved up the deposit for a home, don’t forget to take into account all the extra fees that come with buying a house which might include some or all of these:
    • stamp duty
    • legal costs
    • disbursements
    • mortgage insurance
    • pest inspection report
    • survey report
    • builder’s report
    • strata inspection report
    • loan application fee
    • valuation fee
    • registration fee
    • sundry fees like refinancing or switching fees.

On a mortgage loan of $300,000 you can expect to pay at least $15,000 in fees. With mortgage insurance, this will rise to about $17,470.

Existing Borrowers

  • Make extra repayments or utilise your offset account where possible to reduce your exposure to higher rates and falling prices
  • Consider switching at least part of your loan to a fixed rate BUT check the flexibility of such loan arrangements. ie will they allow extra repayments or is there early payout penalties?
  • Consider carefully further borrowing against the equity built up in your home, allow yourself a cash or equity buffer – just in case

Investment Property Finance

Investment property finance can best be defined as a loan for the purposes of purchasing property that will be used specifically as an investment; ie the property will be rented out and will deliver rental income to the owner as opposed to the property being used by the owner as a primary residence.

A buyer seeking finance for an investment property may require this finance to be structured slightly differently than that for an owner occupied property. There may also be additional considerations if the investment property finance is for the purposes of extending an existing investment portfolio.

Be Careful of ‘Honeymoon’ Intro Rates

Home lenders entice borrowers to their home loans with attractive low introductory rates. These rates may be up to 2 percentage points below the standard rates for home loans and therefore look very attractive. But these “honeymoon rates” only last for six months to a year before automatically reverting to the standard rate offered by that lender.

By all means take advantage of these discounted rates but don’t let them dictate your choice of loan. It is far more important to compare loans by flexibility of features and the standard rate that you will face for years into the future. The ‘comparison rate’ that lenders must publish for each loan is a much better tool with which to compare the true interest and fees costs of different loans.

Consider Whether You Need a Redraw Facility

A redraw facility allows you to make additional repayments on your mortgage, and then have access to the additional repayments if you need to.

However, the facility is normally only available on “Standard Variable” loans, which are more expensive than basic variable loans. Before you choose the more expensive loan, make sure you understand the conditions attached to the redraw facility as it may include a minimum amount and a fee every time you use it. Be aware that you can get the fully featured standard variable loans at a discount interest rate these are usually called professional packages and annual fees vary between $200-$400 per annum.