Doing your home loan homework

For many people, purchasing property is the most significant financial decision they’ll ever make. A home loan helps make it all possible, and choosing the right one is crucial. The right decision now can make a huge difference to the total amount you’ll pay over the life of the loan.

With interest rates at record lows, now is the ideal time to shop around and see what the banks and various financial institutions are offering. Whether you want a better deal than you’re currently getting or are looking for a loan to finance an upcoming property purchase, it’s worth wrapping your head around the features, fees and interest rates of various loans.

Calculate your budget
This is absolutely crucial; your budget will determine how much you can afford to borrow. Remember it’s not just mortgage repayments you must consider, but also all the associated ongoing costs of property ownership; utilities, council rates, body corporate fees, maintenance and more. Remember too that, while interest rates are at an all time low now, they’re bound to start increasing again at some point; higher interest rates will mean larger repayments, so factor that into your long-term financial plan.

Compare what’s out there
Actively shop around for the best deal. Ensure that you receive a key facts sheet for every loan you consider; this will help you make accurate comparisons. The key facts sheet will present information like the total amount you’ll repay over the life of the loan, fees and charges, and a comparison rate unique to your situation. Lenders must provide a key facts sheet when you request one.

Check that your lender or broker is either licensed with ASIC, or authorised to act on behalf of a licensee, and read the fine print on every loan so you won’t be caught out by any hidden fees.

Consider interest rates
There are two types of interest rates: variable and fixed.

A variable interest rate goes up and down. Often you get the flexibility of being able to make extra repayments and pay off your loan faster; the flipside is that your lender can also increase the rate, and therefore the size of your repayments.

A fixed rate lets you lock in an interest rate for a certain period of time, although the loan will revert to a variable rate when that time period expires. With a fixed rate loan, you can avoid increased interest rates and your repayments remain constant throughout the fixed rate period. The disadvantages are that you risk missing out on falling rates, and often you miss out on the opportunity to make additional contributions and repay the loan faster.

Choose your type
A standard loan allows you to make regular payments to cover the principal amount borrowed, plus interest. Fixed, variable and partially-fixed rate loans are all variations on a standard loan.

You can usually pay off the full balance at any time, and you can make extra repayments, reducing your interest, and allowing you to redraw on your additional payments at a later stage. A standard loan also gives you the option of opening an offset account, so that your savings offset the balance of your loan, reducing the interest.

Be aware, however, that some lenders will charge you a fee if you pay out early or refinance the loan. In some cases, your lender might not let you redraw funds when you want them, so always check the loan conditions.

There’s also a split rate or partially fixed loan. In this instance, you pay a fixed rate on part of the loan and a variable rate on the remainder.

The advantages are that you always know what the repayments will be on the fixed portion, and you usually have the option of making extra repayments on the variable portion, allowing you to save money when the variable rate decreases. The disadvantages are the restrictions on the loan flexibility; as there may be a fee for paying out or refinancing the fixed rate portion of the loan.

Other loans
There are some other specialised products out there that are worth being aware of:

• Introductory rate loans: Aimed at first home buyers, these loans offer a ‘honeymoon period’ with a discounted interest rate. These offers can be enticing; just be aware that, when the introductory offer ends – usually after 12 months – you’ll be slugged a hefty fee if you want to get out of the loan.
• Construction loans: This type of loan applies for those building a new home. During construction, you won’t need the money in a lump sum, so it can drawn down in stages (land purchase, slab, roof, lock up and final stage), you only pay interest on the amount you’re actually using.
• Professional packages: Professional packages, or pro packs, generally include interest rate discounts for variable loans, up to four fee-free credit cards, free or discounted savings and offset accounts, discounts for landlord protection, building or other types of insurance, and reduced fees (sometimes even no fees) for certain services.
• Low-doc loans: These types of loans don’t require traditional proof of income; instead, borrowers provide self-certification by filling out a declaration to confirm they are able to repay the money. Low-doc loans are useful for the self-employed and full-time investors.
• Bridging loans: These assist in providing funds when the sale of an existing property won’t be completed until after the new home is settled.
• Reverse mortgages: Retirees can use a reverse mortgage to borrow money against the equity they have built up in their home.

Finding the right loan requires some dedicated research, and the type you choose will depend very much on your own personal circumstances. It’s worth shopping around and getting it right!