Finding the right home loan to suit your needs can feel a lot like searching for a needle in a haystack. Thankfully, by arming yourself with the right information to compare mortgage rates, fees and features, you should be able to make an informed decision (that doesn’t break your budget).
While there is more to a home loan than the interest rate on offer, your mortgage rate is one of the most significant factors in determining the overall cost of the loan. That being said, a common misconception is that a higher mortgage rate equals a more expensive, or unsuitable, home loan. In many instances, first home buyers, investors and refinancers alike, may come out financially on top by knowing how to properly perform a home loan comparison.
So, let’s explore everything you should look for when you compare mortgage interest rates, and the tips and tricks to keep in mind so you can be your own mortgage broker.
What to consider when comparing mortgage rates
When you’re looking for an Australian home loan, there are a number of factors you should be investigating that could determine which option is right for you. Here are five key questions to ask when you’re researching mortgage rates:
1. What is the comparison rate?
The home loan with the lowest mortgage rate isn’t always the cheapest option. In fact, a home loan with a high interest rate may charge you fewer fees than an alternative home loan with a lower rate. This is where a comparison rate comes in, as it may help illuminate which option is more affordable.
A mortgage comparison rate can be a more accurate way to determine how much a home loan could cost you. A comparison rate factors in both the advertised interest rate, and many of the fees charged by the lender, based on a $150,000 25-year home loan.
Comparison rates were launched several years ago, so it’s safe to say that nowadays $150,000 home loans are a thing of the past. That being said, a comparison rate can still be one way borrowers can narrow down their home loan options to determine which mortgage rate is actually more affordable in the long run. For example if a comparison rate is significantly higher than the advertised rate of a home loan, this may indicate there are excessive fees involved.
2. What is going on with the market?
When you’re looking for a home loan, you’ll likely be choosing between a fixed rate loan, or a variable rate loan. Fixed interest rates are locked in for a set period of time, typically 1-5 years. Over this term, the interest rate will not change, allowing you stability in your mortgage repayments, and protection from a rising-rate environment. Variable interest rates are subject to market fluctuations, meaning if rates rise, so too will your repayments. That being said, many home loan features are reserved by lender’s for their variable rate loans.
So, when it comes time to choose between fixed or variable mortgage rates, it’s worth taking stock of the interest rate market. If experts and journalists are suggesting that home loan interest rates will rise, and that the Reserve Bank of Australia (RBA) is steering towards hiking the cash rate, opting for a fixed rate mortgage may protect your repayments from rising too.
However, if interest rates are tipped to fall, a variable rate home loan may allow you to take advantage of a dip in the market, as your monthly repayments will fall too. The type of home loan you choose matters just as much as the actual mortgage rate in determining the amount of interest you’ll pay.
3. What repayment type best suits you?
It’s also important to consider which repayment type best suits your budget and goals. Home loans typically default to principal and interest repayments, meaning you’re repaying your mortgage debt and the interest charges. However, some home buyers may opt for interest-only repayments, in which they strictly repay the interest rate charges for a set period of time.
Interest-only repayments can be a competitive choice if:
- You’re an investor looking to keep expenses low, particularly if you’re planning on flipping the property, or
- You’re going to live in the home, but need relief in your budget after saving up for a mortgage.
As you’re only repaying the interest charges, your monthly payments are significantly lower. However, you are not paying down your mortgage debt. Once the interest-only period ends, your repayments will likely be significantly higher, as you’ve essentially just lessened your loan term and not the loan amount you owe. If an interest-only mortgage rate is a better option for your financial needs and situation, just keep in mind that when it reverts back to principal and interest repayments (if you do not sell the property in that time), you may need to budget for higher payments as your loan balance remains the same.
4. Does it come with perks or packages?
While a low rate home loan is always worth considering, you may also want to investigate whether the lender is offering any benefits for new customers, or packaging any products into the home loan.
Home loan providers may offer generous cash back offers for refinancers and new purchases. Reduce Home Loans offers cash back deals up to $10,000, depending on the homeowner’s property value. This is cash that could be put into a new appliance for your home, used to cover the cost of your refinance, and even chip away at your principal owing.
Some lenders also offer packaged mortgage deals, in which you may be able to open multiple products with the lender, such as a transaction account, savings account, credit card and a home loan. Often a home loan package may come with higher fees to cover the cost of the credit card, so be sure to read the product disclosure statement (PDS) before applying.
5. Is a lower rate really better?
As you can see, there are a number of additional factors that influence the real value of a home loan. This means that sometimes choosing the lowest interest rate option isn’t always the best fit for your home loan goals.
For example, for first home buyers trying to get a foot on the property ladder, you may choose to apply for a basic, no-frills home loan with a low rate and no features. However, a home loan with a slightly higher interest rate may also come with helpful features, like being able to make extra repayments, or an offset account. These features can come in handy in a rising-rate environment, as extra repayments help to reduce your loan, and an offset account can lower the interest charged on your mortgage. If the hypothetical first home buyer had opted for the higher mortgage rate option, they may have been able to use these features to give themselves a rate cut while interest rates hiked across the country.
Additionally, an investor may purchase an investment property, and choose to pay a higher mortgage rate for the benefit of interest-only repayments. Their strategy is to renovate the property and sell it for a profit within two to three years. They are not looking at long term rental yields or worrying about paying off the mortgage quickly. Instead, their priority is spending the least (low home loan repayments) to ensure the greatest return on investment. In this instance, the higher interest rate option may better suit their needs.
When you’re comparing mortgage rates, be sure to take stock of the entire home loan – and not just the rate – to determine its true value to you.
What else to consider when comparing home loans
Now you know what to look for when you’re comparing mortgage rates, let’s explore other features of a home loan should you consider:
- Fees – What fees will the lender be charging? This includes upfront fees, like application fees or settlement fees, ongoing fees, like annual fees, and exit fees, like break fees for leaving a fixed rate term early.
- Features – Is the lender offering any helpful features, like a redraw facility, an offset account, the ability to make extra repayments or split your home loan rate? Having helpful features may impact the mortgage rate you are offered.
- Lender – Just because you’ve been with the same bank your whole life, doesn’t mean it will offer you your best home loan deal. It is always important to compare different lenders outside of your childhood bank to ensure you’re getting the best bang for your buck.
- Your financial situation – It’s not just the lender that determines the mortgage rate you’re offered, but your financial situation as well. The less risk you pose to a lender that you could default on your mortgage repayments, the greater your chances of being offered a competitive home loan. There are a multitude of eligibility factors that a lender will assess to determine which interest rate you may qualify for, including:
- The size of your deposit – If you apply for a home loan with a larger deposit of at least 20%, you may be more likely to qualify for a lower interest rate. Some of the lowest home loan rates are reserved for borrowers with loan-to-value ratios (LVRs) of 80% or lower. Plus, you’ll also avoid paying costly Lender’s Mortgage Insurance (LMI)
- Your credit score – Having a good to excellent credit score is considered ideal when applying for a home loan. The higher your credit score, the lower the risk to the lender, and the more competitive your home loan offer may be.
- Your job – How long have you been employed for, and what are your contact hours? Lenders look for stability in your finances when determining whether or not you can service a loan responsibly. A borrower employed on a full-time basis for over 12 months may be more likely to gain loan approval than one still in the probation period.
For more information on comparing mortgage rates, or to hear about some of the most competitive home loan offerings in Australia, please don’t hesitate to speak 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.