4 hard truths about your first or next home loan

The great Australian dream has long been to purchase your own home. However, this doesn’t mean the process of getting that home is a dream. In fact, it can be a stressful and lengthy experience if you’re unprepared.

 

There are a few hard truths that first and next home buyers need to consider when it comes to taking out their first or next home loan.

 

  1. Look outside of your first bank

Interest rates are on the rise again following several hikes to the cash rate by the Reserve Bank of Australia in 2022. This means that it’s important to look outside of your childhood bank for a home loan if you’re hoping to nab a lower rate loan.

 

While this sounds like bad news for homebuyers, it’s actually a great reminder to compare your options. Don’t just settle for a loan offered by the same bank you’ve been with since you were a kid. There are a range of home loans still with rates starting with a ‘‘3’, including a competitive first home buyer home loan from Reduce Home Loans.

 

This hard truth is especially important for existing customers of the bigger financial institutions in Australia. Traditional, brick-and-mortar lenders have historically offered home loans with higher rates and fees than the low-rate competitors out there. This is because they tend to have more overheads, like branches, than online lenders who can pass these savings on to customers in the form of lower rates and fees.

 

And existing borrowers beware, as banks charge a “loyalty tax” to mortgage customers who stay with the one lender for the life of the loan. The loyalty tax refers to how new home loan customers are almost always offered lower interest rates, waived fees and other perks, such as cash back deals, compared to existing customers. If you’re hoping to avoid the loyalty tax, especially in a higher rate environment, it may be worth considering refinancing.

  1. Save a bigger deposit than you think you need

In the past, you may have been able to nab a home loan with a deposit as small as 5 per cent of the property value.

 

However, thanks to stricter lending conditions, lenders typically are looking for borrowers with deposits of at least 20 per cent, or loan-to-value ratios (LVRs) of at least 80%. This is for the benefit of all borrowers, as taking on too much debt with very little buffer can lead to financial stress and even default.

 

Nowadays, some of the cheapest home loans on the market are reserved for borrowers with LVRs of at least 60 – 70 per cent. Not only could this put you in a better position to be offered a lower interest rate, but it allows borrowers to avoid paying costly Lender’s Mortgage Insurance (LMI).

 

For capital cities, particularly Sydney and Melbourne, saving up a deposit of this size can feel overwhelming. However, as the next point will explain, this is why it may be worth considering taking smaller steps so you can climb up the property ladder.

  1. Dream home versus dream suburb

A recent Coronis survey found that over half (54 per cent) of respondents who own, or are buying their own home, are now looking for property outside of their ideal suburb to instead get a home which meets their needs.

 

As the housing market stays competitive in Australia, you may need to make the hard decision between dream home and dream suburb before you begin your real estate search.

 

If this is your first property, there’s something you’ll need to understand quickly: most Aussies typically cannot afford to buy their dream home first go. This is why it’s called a property ladder, as it’s generally expected that you’ll climb your way up through various property purchases to reach your dream home.

 

Further, one of the most common mistakes of first-time property buyers is choosing a suburb out of their price range. This is why experts typically recommend considering “bridesmaid” suburbs, otherwise known as suburbs neighbouring your ideal suburb.

 

  1. Rates will continue to rise in 2022

The RBA Governor, Philip Lowe, recently stated that inflation is expected to reach 7% by December. As the latest cash rate hikes are in response to rising inflation (amongst other reasons), economists are predicting interest rates on home loans will continue to increase over the next few months.

 

This means it may be worth factoring in whether you could afford a higher interest rate compared to the home loan you’re considering borrowing. See how your budget could look if you were making repayments on a loan that was even 2 percentage points higher. Using a mortgage repayment calculator may come in handy here.

 

 

This also means it may be worth prioritising home loans that offer features that help you reduce your repayments and interest charges, such as an offset account. For example, making extra repayments on your home loan may save you thousands of dollars in interest and shave years off your loan.

 

On a 25-year, $400,000 home loan at a rate of 2.3 per cent, if you were to make additional repayments of $500 each month, you could save $35,527 in interest and shave 7 years and 7 months off of the loan. Use Reduce Home Loans Mortgage Extra Repayment Calculator today to find out just how much you could chip away at your home loan before rates rise again.

 

Any statements are general in nature and do not take into account your financial personal situation, objectives or needs. You should consider whether any statement/s is suitable for you and your personal circumstances. Before making any financial decision, consider your circumstances and the product disclosure statement.

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(29)    For the Rate Cutter Variable where the borrower pays $1170 upfront fees then a corresponding loyalty discount of 0.10% p.a. off the Rate Cutter Variable (at that time)  will automatically apply after the 5th anniversary of the loan.  These fees and loyalty discount are factored into the comparison rate.  The loan setup fees are not refundable.

(27)    For the Investor Rate Slasher Cash Back Variable where the borrower pays $0 upfront fees then a corresponding loyalty discount of 0.06% p.a. off the Investor Rate Slasher Cash Back Variable (at that time)  will automatically apply after the 5th anniversary of the loan.  These fees and loyalty discount are factored into the comparison rate.  The loan setup fees are not refundable.

(26)    For the Low Rider Cash Back Variable where the borrower pays $0 upfront fees then a corresponding loyalty discount of 0.06% p.a. off the Low Rider Cash Back Variable (at that time)  will automatically apply after the 5th anniversary of the loan.  These fees and loyalty discount are factored into the comparison rate.  The loan setup fees are not refundable.

(25)    For the Economizer Cash Back Variable where the borrower pays an upfront fee of $697 then a corresponding loyalty discount of 0.08% p.a. off the Economizer Cash Back Variable (at that time)  will automatically apply after the 5th anniversary of the loan.  These fees and loyalty discount are factored into the comparison rate.  The loan setup fees are not refundable.

(24)    For the Super Saver Cash Back Variable where the borrower pays an upfront fee of $697 then a corresponding loyalty discount of 0.10% p.a. off the Super Saver Cash Back Variable (at that time)  will automatically apply after the 5th anniversary of the loan.  These fees and loyalty discount are factored into the comparison rate.  The loan setup fees are not refundable.

(23)    For the Super Saver Variable where the borrower pays an upfront fee of $1170 then a corresponding loyalty discount of 0.15% p.a. off the Super Saver Variable (at that time)  will automatically apply after the 5th anniversary of the loan.  These fees and loyalty discount are factored into the comparison rate.  The loan setup fees are not refundable.

(22)    For the Economizer Variable where the borrower pays an upfront fee of $1,170 then a corresponding loyalty discount of 0.11% p.a. off the Economizer Variable (at that time)  will automatically apply after the 5th anniversary of the loan.  These fees and loyalty discount are factored into the comparison rate.  The loan setup fees are not refundable.

(21)    For the Investor Cash Back Hero Variable where the borrower pays an upfront fee of $697 then a corresponding loyalty discount of 0.08% p.a. off the Cash Back Hero Variable (at that time)  will automatically apply after the 5th anniversary of the loan.  These fees and loyalty discount are factored into the comparison rate.  The loan setup fees are not refundable.

(18)    For the Home Owners Dream 1 year fixed where the borrower pays an upfront fee of $697 then a corresponding loyalty discount of 0.20% p.a. off the Home Owners Dream reverted variable rate (at that time)  will automatically apply after the 5th anniversary of the loan.  These fees and loyalty discount are factored into the comparison rate.  The loan setup fees are not refundable.

(20)    For the Cash Back Hero Variable where the borrower pays an upfront fee of $697 then a corresponding loyalty discount of 0.08% p.a. off the Cash Back Hero Variable (at that time)  will automatically apply after the 5th anniversary of the loan.  These fees and loyalty discount are factored into the comparison rate.  The loan setup fees are not refundable.

(14)   For the Investor Rate Slasher where the borrower pays an upfront fee of $1,170 then a corresponding loyalty discount of 0.09% p.a. off the Investor Rate Slasher rate (at that time)  will automatically apply after the 5th anniversary of the loan.  These fees and loyalty discount are factored into the comparison rate.  The loan setup fees are not refundable.

(12)   For the Investor Rate Lovers Interest Only where the borrower pays an upfront fee of $697 then a corresponding loyalty discount of 0.07% p.a. off the Investor Rate Lovers Interest Only rate (at that time)  will automatically apply after the 5th anniversary of the loan.  These fees and loyalty discount are factored into the comparison rate.  The loan setup fees are not refundable.

(11)   For the Wealth Maximizer 3 year fixed Principal & Interest where the borrower pays an upfront fee of $697 then a corresponding loyalty discount of 0.20% p.a. off the Wealth Maximizer reverted variable rate (at that time)  will automatically apply after the 5th anniversary of the loan.  These fees and loyalty discount are factored into the comparison rate.  The loan setup fees are not refundable.

(10)    For the Wealth Maximizer 2 year fixed where the borrower pays an upfront fee of $697 then a corresponding loyalty discount of 0.20% p.a. off the Wealth Maximizer reverted variable rate (at that time)  will automatically apply after the 5th anniversary of the loan.  These fees and loyalty discount are factored into the comparison rate.  The loan setup fees are not refundable.

(9)    For the Home Owners Dream 3 year fixed where the borrower pays an upfront fee of $697 then a corresponding loyalty discount of 0.20% p.a. off the Home Owners Dream reverted variable rate (at that time)  will automatically apply after the 5th anniversary of the loan.  These fees and loyalty discount are factored into the comparison rate.  The loan setup fees are not refundable.

(8)    For the Home Owners Dream 2 year fixed where the borrower pays an upfront fee of $697 then a corresponding loyalty discount of 0.20% p.a. off the Home Owners Dream reverted variable rate (at that time)  will automatically apply after the 5th anniversary of the loan.  These fees and loyalty discount are factored into the comparison rate.  The loan setup fees are not refundable.

(7)    For the Investor Rate Slasher where the borrower pays an upfront fee of $1,170 then a corresponding loyalty discount of 0.09% p.a. off the Investor Rate Slasher rate (at that time)  will automatically apply after the 5th anniversary of the loan.  These fees and loyalty discount are factored into the comparison rate.  The loan setup fees are not refundable.

(6)    For the Investor Rate Buster Variable where the borrower pays an upfront fee of $697 then a corresponding loyalty discount of 0.08% p.a. off the Investor Rate Buster Variable rate (at that time)  will automatically apply after the 5th anniversary of the loan.  These fees and loyalty discount are factored into the comparison rate.  The loan setup fees are not refundable.

(5)    For the Rate Buster Variable where the borrower pays an upfront fee of $150 then a corresponding loyalty discount of 0.05% p.a. off the Rate Buster Variable rate (at that time)  will automatically apply after the 5th anniversary of the loan.  These fees and loyalty discount are factored into the comparison rate.  The loan setup fees are not refundable.

(4)For the Rate Slasher Variable where the borrower pays an upfront fee of $1,170 then a corresponding loyalty discount of 0.08% p.a. off the Rate Slasher Variable rate (at that time) will automatically apply after the 5th anniversary of the loan. These fees and loyalty discount are factored into the comparison rate. The loan setup fees are not refundable.

(3) For the Investor Rate Lovers Variable where the borrower pays $0 upfront fees then a corresponding loyalty discount of 0.06% p.a. off the Investor Rate Lovers Variable rate (at that time) will automatically apply after the 5th anniversary of the loan. These fees and loyalty discount are factored into the comparison rate.  The loan setup fees are not refundable.

(2)For the Rate Lovers Variable where the borrower pays $0 upfront fees then a corresponding loyalty discount of 0.06% p.a. off the Rate Lovers Variable rate (at that time)  will automatically apply after the 5th anniversary of the loan.  These fees and loyalty discount are factored into the comparison rate.  The loan setup fees are not refundable.

(1) For the Low Rider Variable where the borrower pays $0 upfront fees then a corresponding loyalty discount of 0.06% p.a. off the Low Rider Variable rate (at that time) will automatically apply after the 5th anniversary of the loan. These fees and loyalty discount are factored into the comparison rate. The loan setup fees are not refundable.

(28) For the Rate Crusher 1 Year Fixed where the borrower pays an upfront fee of $697 then a corresponding loyalty discount of 0.05% p.a. off the Rate Crusher reverted variable rate (at that time) will automatically apply after the 5th anniversary of the loan. These fees and loyalty discount are factored into the comparison rate. The loan setup fees are not refundable.

(19) For the 1 Year Fixed Wealth Maximizer where the borrower pays an upfront fee of $697 then a corresponding loyalty discount of 0.20% p.a. off the 1 Year Fixed Wealth Maximizer reverted variable rate (at that time) will automatically apply after the 5th anniversary of the loan. These fees and loyalty discount are factored into the comparison rate. The loan setup fees are not refundable.