How to Choose a Home Loan

You dont need to be told about the gravity of this decision; you already know that choosing to buy, build or upgrade your home is a life changing decision, and one which is likely to go on affecting your life for the next 20 to 30 years. So instead of telling you all about the importance of your home loan decision, weve listened to your questions and found just the answers you were looking for.

Here we have created a comprehensive guide to choosing a home loan to help every Australian in every buying situation feel confident they are making the right decision. We can help you understand the different types of home loans available, take you through home loan features which can save you time and money from your mortgage, as well as point out where the common home loan traps are, so you can navigate your way around them safely. Even if you think you are ineligible for a home loan or cant afford the repayments for the next 30 years, there are ways to make home ownership easier and more affordable if you just know how, and are dedicated to being a little different in your money management and repayments.

Featured Australian Home Loans

Home Loan	Details	Interest Rate (p.a.)	Comp Rate^ (p.a.)	App Fee / Ongoing Fee	Max LVR	Min & Max Borrowing
Loans.com.au – Dream Catcher​	Keep your repayments down with a low variable rate and no application fee.	5.85%	6.21%	$0 / $375	80%	$50,000 / $750,000
Bankwest Online Home Loan	One of the low interest rate home loan with a low ongoing fee.	5.97%	5.97%	$0 / $0	80%	$100,000 / $1,000,000
Illawarra Home Loans Bank Beater Home Loan	A very low variable rate, beaten down even further by 0.05% p.a. after 5 years.	6.07%	6.35%	$0 / $345	90%	$250,000 / $1,000,000
State Custodians Mortgage Company Standard Variable Offset Loan	Voted the best loan for first home buyers, this loan offers no application or ongoing fees and a stack of great features including unlimited redraw and 100% interest offsetting.	6.02%	6.23%	$0 / $345	95%	$150,000 / $1,000,000
Loans.com.au – Dream Loan Express​ – 2 Year Fixed Rate	A home loan offer with $0 application fee and one of the lowest available fixed rate options in market.	5.68%	6.07%	$0 / $0	80%	$50,000 / $750,000
ME Bank Members Package – Eligible members with a Member Package	Flexible repayment options and a low rate to match	6.19%	6.19%	$0 / $395	80%	$50,000 / $2,500,000
Loans.com.au – Dream Loan Express – Variable Home Loan (80.01% -95%)	A home loan offer with a $0 application fee and one of the lowest available home loan interest rates.	6.20%	6.22%	$0 / $0	80.01% – 95%	$50,000 / $750,000

So please take the time to have your questions answered here so you can stop being daunted and start enjoying the excitement of home ownership. If you have a question which we havent answered here or youd like more information about your specific home loan situation, then contact Home Loan Finder directly.

Knowing Your Limits

Knowing what you want and need from a home loan is important, but before you can start choosing loan features and terms, you need to know what you can afford, and how you plan to repay your home loan. Your parents and grandparents would have structured their home loans and budgets to repay their mortgage as soon as possible, however, this is not always the best option because it can leave you with just one asset in your home, and little savings and no other investments to retire on. Therefore, dont assume that a home loan must be for a set 25 year term and youll pay the same amount each month because you can choose flexible repayments to meet your income and of course still search for the best interest rate.

How much can I afford to borrow?

When you apply for a home loan or visit a broker they will assess your situation and tell you how much you are allowed to borrow based on your income and expenses. This should be used as a guide only, and should not replace your own calculations. Take the time to look at your budget and lifestyle and look at the real impact your repayments would have what would you have to give up, would you be able to stick to your budget each and every month?

In your calculations you should also prepare yourself for an interest rate rise of at least 2% because even if you choose a fixed interest rate loan, at the end of the fixed period usually a maximum of 10 years your loan will revert to a standard variable loan. Therefore, calculate what your repayments would be if rates rose, and whether it is still comfortable for you.

Knowing Whats Out There

Before you choose a home loan, make sure you know about all of your choices because there are new home loan products and types released regularly and you dont want to miss out on an innovative new product which could be the perfect fit for you.

What is an introductory home loan?

You may also hear these referred to as honeymoon home loans as they offer a lower interest rate for a certain period of time after your loan account is opened. While longer than most honeymoons, an introductory home loan usually offers a discounted interest rate for 12 months.

After the introductory period the interest rate will revert to the standard variable rate of the lender, where you may previously have been getting a discount on this rate, or a fixed lower interest rate. With introductory loans you will need to be aware of early exit fees if you refinance or close the loan account within the first three to five years, because lenders will want to recoup the costs of the discounted rate over the life of your loan, but cant do that if you leave; instead they may charge you higher exit fees.

What is a standard variable rate home loan?

With a standard variable interest rate your repayments can fluctuate from month to month with this loan as the Reserve Bank of Australia adjusts the official cash rate, so too may your lender raise their home loan rates and in turn your repayments. However, a standard variable loan is one of the most flexible types of loans where adjusted repayments are a small price to pay for the ability to make additional repayments, redraw those repayments, switch to a fixed rate or want to repay your loan earlier as there are fewer exit fees.

Standard variable rate loans also often offer ongoing discounted interest rates, tiered on the amount you borrow. For example you may be able to ask your lender for a 0.4% discount when you borrow more than $250,000 or a 0.7% discount when you borrow more than $500,000.

What is a basic variable rate loan?

These loans also have a variable interest rate which can fluctuate with the official cash rate, however, because the loan is a no frills option and has fewer features, the interest rate is already one of the lowest available on any loan product. In exchange for this low interest rate, you are often giving up features such as additional repayments, as the loan product is cheaper and easier for the lender to manage, and they pass these savings on to you in the form of a lower rate.

At the same time, if you are interested in a basic variable home loan, more and more lenders are offering redraw facilities for example, to attract customers.

What is a fixed rate home loan?

A fixed interest rate loan enjoys a fixed rate and fixed repayments for a certain period of time. You can usually choose a fixed rate term of between one year and 10 years, during which you will not be affected by rate rises or lender changes. At the end of your fixed rate period you can choose to revert to the lenders standard variable rate, or you can apply for a new fixed interest rate.

Just keep in mind that a fixed rate is really only beneficial if official rates are rising and continue to rise during your fixed term. Plus, if you want to enter a new fixed interest rate term, the interest rate is likely to be higher than the one you previously enjoyed as the lenders take interest rate movements and predictions into account when setting their fixed rates. You may also face higher exit fees if you close your loan account during a fixed rate period.

How can I benefit from a split loan?

Splitting your loan account allows you to spread the risk of interest rate movements and you can often split your loan up to four times depending on the lender. For example you could split your $250,000 home loan to keep $100,000 on a variable interest rate, $50,000 of the loan on a two year fixed rate term and the remaining $100,000 on a five year fixed rate term.

In this way you are retaining the flexibility and features of a variable rate loan so you can make additional repayments or redraw from your loan, but you are also protected from the full brunt of interest rate rises.

How can I use an all in one loan?

An all in one loan is also known as a transactional mortgage because it takes over the role of all of your other bank accounts. From your home loan you can make ATM withdrawals and EFTPOS purchases, you can save for a holiday and have your wages deposited directly into the account. This saves you time in managing all of these other bank accounts, and money in account keeping and transaction fees.

At the same time you will need to be very disciplined to use an all in one account to keep your savings on track and your home loan repayments available. However, all of the funds in your all in one loan account above the value of your repayment offset the interest charged on your principal loan amount.

What is an online home loan?

An online loan can offer competitive interest rates and inclusive features, but there is usually more to an online lender than meets the eye sometimes for the better, and sometimes for the worse. When applying for and managing such an important financial transaction as your home loan you need to make sure you are getting all of the information and service you need, as well as the security of a lender who will be there for you for the next 20 or 30 years. With an online lender it is easy to be mislead and you will need to do your research to make sure the lender is reputable.

However, many online lenders are owned by real world banks. For example online lender On direct is owned by ANZ Bank and HomePath is a non-guaranteed subsidiary of the Commonwealth Bank. These and other online lenders offer low interest rates and features such as redraw and the ability to split your loan between a fixed and variable rate. Just remember that these lenders do not have branches you can visit, and you will have to deal over the phone, online or through a broker.

Do I need a low doc loan?

Low doc home loans are specially suited to self employed borrowers who cannot provide the same documentation regarding their income as someone who earns a wage. If you are a contract worker or run your own business you may know that you can afford your loan repayments, but your business profit and loss statement is not usually enough for the lender to approve your loan.

Instead you can self verify your income for loan approval, but you will often have to supply a 20% deposit as a low doc borrower. You may also be subject to a higher interest rate which can be as much as 3% higher than standard interest rates. If you cant get a lower interest rate at the time of application, some lenders will reduce the interest rate on a low doc loan to the standard level after one to five years, once you have shown your responsibility with repayments.

Knowing What Itll Cost You

While interest rates are an important factor in your choice of home loan, they are not the only cost you should be worried about a low interest rate home loan may have a truck load of fees attached, and it can end up costing you more in the long run, than if you had chosen a slightly higher rate and fewer fees.

To help with these comparisons lenders are required to provide a comparison interest rate which is a representation of how much the loan will cost you over the course of a year, including interest rate charges and fees.

You can also be on the lookout for home loan fees such as:

• Application fees. These may be charged when you first start your loan application and can include establishment fees to cover the costs for the lender. Keep in mind that if you dont go ahead with the loan or you are ineligible you may not get the application fees returned.
• Valuation fees. Make sure you also check your loan eligibility with the lender before they conduct a valuation of the property as you may have to pay for this valuation even if your loan is not approved. The valuation allows the lender to calculate the security over the loan, and establish the loan to value ratio.
• Exit fees. Ask up front about the costs to repay the loan early or refinance your mortgage because there are loan products which do not charge refinancing or exit fees. However, exit fees, deferred establishment fees and early settlement fees can run into tens of thousands of dollars, or be calculated as a percentage of the amount borrowed, usually 1%.
• Lenders Mortgage Insurance. If your loan to value ratio is greater than 80% on a standard loan and greater than 60% on a low doc loan, you will usually have to pay lenders mortgage insurance. This protects the lender from the costs if you default on your loan, and can be charged up front, or spread over the term of your loan in your repayments. Some lenders will allow you to borrow up to 85% of the property value without LMI however, be aware that these loans often have a higher interest rate. Always remember than LMI does not protect you or your family if you cant make your repayments, and if you want to insure your mortgage, you may need to take out specific income protection or mortgage insurance.
• Break costs. These can be charged if you exit a fixed interest rate term early, as a way for the lender to recoup their costs, for example these exit fees will be much higher if the current variable interest rate is lower than the fixed interest rate you had been paying. As a result, the break costs can be made up of all of the lost interest your lender would have made if you have paid out the fixed term at the higher interest rate.

Knowing Which Features You Need

Now you know how to ensure you find an affordable home loan product, you can start deciding how you want to use your home loan. Making these decisions before you apply for a loan can help ensure you secure a loan product with everything you need from the beginning, because signing up for a basic home loan and then deciding to call in additional features can mean higher fees than you would pay with a loan which included those features from the beginning.

Which features do I need to compare?

The features you choose for your home loan will depend on whether this is your first home, an investment or a loan for a holiday house, so consider whether these features could help you manage your loan more easily:

• Additional repayments. When you make an additional repayment above the minimum loan repayment this directly reduces your principal loan amount with a reduced principal there is less interest charged and you save both time and money in repaying your mortgage. However, these savings can be eaten away if your home loan charges you to make additional repayments; typically a fixed interest rate loan will charge you break fees to make additional repayments.
• Redraw facility. You may find it easier to channel all of your spare funds into your home loan if you know you can access those funds in an emergency. With a redraw facility you can withdraw from your loan, up to the amount of additional repayments you have made, to cover emergencies, bills or to act as your savings. When comparing redraw facilities make sure you check for fees or limits to the number of redraws you can make in a year, and whether there are minimum or maximum limits.
• Repayment holiday. There are times when you may need to take a repayment holiday, if you have had a baby for example, or you are taking an actual holiday and want to free up your funds for the extended trip. Some home loans will allow you to put your repayments on hold, or pay just a reduced amount for a period of six months. The conditions of repayment holidays differ between lenders and you may have had to have held the loan for a certain period of time, usually 18 months, and you may have to make higher repayments at the end of the holiday to make up the value of the missed repayments.
• Additional extras. Your home loan lender wants to secure you as a long term customer and so may also offer discounts or waivers of fees on other products such as a free transaction account or credit card, for the life of your home loan.
• Offset account. An offset account is a linked transaction account which allows you to reduced the amount of interest you pay on your loan. The wages, savings and other funds you keep in your offset account will reduce the loan amount which is subject to interest charges. For example, if you have a $250,000 loan and you have $10,000 in your offset account, you will only be charged interest on $240,000 of your home loan. With an offset account you may be subject to a higher interest rate, so make sure you are able to keep enough savings in your account to make it worthwhile. Also make sure you are getting a 100% offset account for maximum savings, because you can also avoid taxes usually charged on savings because you are not taxed on interest saved with an offset account.

This can all seem like a lot of information to take in, but in taking the time to understand and compare the different home loan types and features, you are putting yourself in the position to make the most informed decision for yours and your family future. Your home loan is much more than just another financial product, it is the foundation on which you build your home and you need to make sure that foundation is strong, inclusive and the perfect fit so that you can manage your finances and repayments, build the life you want in your home and feel secure in the knowledge that your home loan product is allowing you to live your life the way you choose. For more help or advice on avoiding a controlling and poorly fitting home loan product, speak to a Home Loan Finder professional mortgage advisor.

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