Do You Have All the Facts When Considering a Home Loan Rate Comparison and Applying for a Loan?

Getting all the facts is an important step before choosing a home loan. You will want to know what you will pay in interest and what features you will get. In addition, lenders will want to know about you and your ability to make home loan repayments.

The process of getting a home loan includes comparing the options and choosing the right one for your needs and circumstances. It also includes getting approved for a loan, which involves an appraisal of your ability to make repayments.

As an initial step, comparing home loan interest rates might seem straightforward. You might use a home loan comparison site that shows you the mortgage interest rates for various loans. Some lenders provide online calculators to compare their products. But using comparison sites and calculators doesn’t necessarily give you all the facts you need to make an informed decision.

 

Is the comparison rate the best way to choose a home loan?

If you check home loan comparison sites, you’ll see an interest rate and comparison rate for each loan. The interest rate listed doesn’t include fees and charges, so it doesn’t provide a true reflection of the total cost.

In contrast, the comparison rate includes fees and charges that apply to the loan, such as the annual, establishment, valuation, legal, discharge and application fees. All these fees are added to the loan principal to calculate the comparison rate.

With the addition of associated costs, the comparison rate is usually higher than the annual interest rate listed on loan comparison sites. For example, a loan with an interest rate of 4.60% might have a comparison rate of 4.80%. The larger the gap between the interest rate and the comparison rate indicates higher overall fees.

Using comparison rates has several shortcomings. The comparison rate is a standard calculation based on a loan amount of $150,000 over 25 years. It was introduced in 2003 when average mortgages were much lower. Also, most home loans now have 30-year terms, so these comparison rates are not as relevant today as they were in the past. Note that different loan terms, fees or loan amounts might result in different comparison rates.

When doing a home loan interest rate comparison, it’s also important to remember that the comparison rate does not include fees for early repayments, redraws, late payments and terminating the loan.

 

 

What about calculators for a home loan rate comparison?

Many lenders offer home loan calculators to compare the loans they offer. So you can compare the interest rates and fees for these loans. While these calculators can serve as a guide, they should not be used to make a decision. These lenders include fine print stating that other factors also need to be considered when choosing a home loan. They recommend that borrowers seek professional advice, such as from a mortgage broker, about which loan will meet their requirements and objectives.

 

Considering a Home Loan Rate - What about calculators for a home loan rate comparison?

 

Looking beyond the interest rate

While comparison rate can be used as an initial guide, it shouldn’t be the only factor when choosing a home loan. You will also want to consider your circumstances, the features and types of home loans, and the reason for purchasing (to occupy the property or invest).

For instance, if you’re a first-home buyer with a limited budget, a basic home loan with limited features and a lower rate might be suitable. But if you want more features and are willing to pay for them.

One of these features is an offset account. This is an everyday transaction account linked to the home loan. By depositing your salary and savings into this account, you will be charged interest on a lower loan balance. For example, if your mortgage is $400,000 and you have $50,000 in your offset account, you are only charged interest on $350,000. Be sure to check all the features of any proposed offset accounts – such as offset limits and ongoing fees – to make sure the offset account is better than alternatives, such as a savings account.

A redraw facility is similar to an offset account in that it reduces your loan balance. The difference is that the redraw amount is the result of making additional repayments above the minimum amount towards your loan (not funds from other sources such as salary and savings for an offset account), and it is not part of an everyday transaction account.

Another potential home loan feature is the ability to make extra repayments to reduce your outstanding loan balance. When you have extra funds available, paying down your mortgage will decrease the balance and the overall interest you pay.

Both the offset account and extra repayment features can be beneficial when interest rates are rising, enabling you to decrease your loan balance and the overall interest charged.

Investors will have other factors to consider besides interest rates. An interest-only home loan only requires the interest on the loan to be repaid. While the principal of the loan is not repaid during the interest-only period, an interest-only loan can benefit the investor wanting to renovate and resell the property to make a profit. These loans have higher interest rates but give investors flexibility in short-term investing.

There’s also the choice between fixed and variable interest rates. A fixed interest rate will give you certainty about your payments over the loan term, while a variable rate will be preferable when interest rates are decreasing. You will want to consider your financial situation and the risks and benefits before you select and apply for a home loan.

 

Looking beyond the interest rate

 

What lenders consider when making lending decisions

While you want to get the best home loan for your needs, lenders want to make sure they have the facts about you that show you are a qualified borrower who can make repayments. Lenders consider what are called the 5 Cs of credit when making a lending decision. These include character, capacity, capital, collateral and conditions.

Character – this is a reflection of your responsibility and willingness to meet obligations. Lenders use your credit report to see how you have dealt with credit in the past, including loans, credit cards and other forms of finance. The credit report is used to generate a credit score, which is a quick indicator of your financial behaviour. Keep in mind that your credit score is impacted when potential lenders pull your report. A home loan expert can help you avoid too many “hard pulls” of your credit report to avoid lowering your score.

Capacity – before approving loans, lenders want to be confident that you will be able to service the loan, which is based on factors such as your sources and stability of your income based on your employment history. It will also include looking at your spending habits and any additional debts you have. For wage earners, lenders will want to see bank statements or payslips to confirm earnings. For the self-employed, lenders will want to see two years of financial statements to confirm income.

Capital – lenders want borrowers to bring their own capital to make their purchases. For home loans, this is the deposit. Lenders will also consider your net worth, which is the difference between what you own and what you owe. A higher net worth points to better savings and budgeting habits and greater financial stability.

Collateral – for a home loan, the collateral is the property itself. Loan amounts are based on the value of the property using the loan-to-value ratio (LVR). For example, if a home is valued at $800,000 and the LVR is 80%, the lender will lend $640,000, and the purchaser will need to come up with $160,000 to apply to the purchase. Other factors mentioned above, including your character, can influence the LVR. For example, a borrower with a solid profile might be able to borrow 90% of the property’s value, while a borrower with a lower credit profile might only be offered 70% LVR.

Conditions – this will include the specifics of the loan, including the interest rate, the loan term, the loan amount and the purpose of the loan. In the case of a home loan, the purpose will be to live in or invest in the property.

When you begin looking for a home loan, you will want to consider how you are placed in relation to the 5 Cs. The experts at Reduce Home Loans can assist you in going through the home lending process, including getting your paperwork ready and submitting it to lenders.

 

Considering a Home Loan Rate

 

Get expert advice for all the facts about home loans

Navigating the web of home loan options and what’s required as a borrower can be confusing. At Reduce Home Loans, you get a Personal Finance Manager who’s fully accredited and qualified to offer you advice on your home loan options. They will provide and explain home loan rate comparisons and guide you through the lending process to minimise stress and uncertainty.

 

For more information on comparing mortgages, get in touch with our team of experts at Reduce Home Loans today.

 

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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