You wouldn’t purchase the first property you saw without performing an inspection and checking out other available options, so why do the same for your home loan?
Gone are the days of relying on the same bank from your childhood for all your financial products. Comparing home loans can not only save you money but time and effort down the road too.
As a mortgage is likely to be the biggest expense you ever face, why wouldn’t you take the time to shop around, do your research and perform a home loan comparison? Let’s explore the benefits of comparing home loans, some common home loan traps to avoid and how you can choose the best home loan for your financial situation and budget.
Benefits of comparing home loans
These are some of the most valuable reasons a home loan borrower can compare their mortgage options before signing on the dotted line.
Save money on interest
Interest charges are one of the most significant factors to impact the total cost of your home loan. If you don’t take the time to compare home loan options you may settle for a higher rate than average and miss out on more competitive deals.
Comparing home loans to find a lower interest rate can save you thousands of dollars over the life of a home loan. For example, on a $500,000 home loan with 25-years remaining, by refinancing to a lower-rate option like Reduce Home Loans Super Saver at 1.94%, you could save almost $70,000 in interest charges compared to the Reserve Bank of Australia’s current average owner-occupier variable rate for existing customers at 2.86%.
Comparing interest rates on $500k, 25-year home loans
|Home loan||Interest rate||Monthly repayments||Total payable over life of loan|
|Reduce Home Loans Super Saver||1.94%||$2,105||$631,409|
|RBA average owner-occupier variable home loan||2.86%||$2,335||$700,443|
Source: RBA Lenders’ Interest Rates. Based on a hypothetical 25-year, $500,000 home loan. Interest rates accurate as of 17/06/2022. Disclaimer: Does not factor in fees or rate changes.
While it’s safe to assume that home loan interest rates will fluctuate over a 25-30-year loan term, the above example demonstrates that by starting with a lender that offers competitive interest rates, you may pay less in interest charges over time.
Save money on fees
It’s not just interest charges that can begin to add up. Some lenders may charge multiple fees so that even a “low rate” home loan option ends up more expensive than expected. The types of fees a lender may charge you includes:
- Upfront fees like application fees
- Ongoing fees like monthly service fees and annual fees
- Exit fees like mortgage discharge fees
One way you can easily compare the fees charged for a home loan is by looking at the comparison rate. For more information on comparison rates, please see further down this guide.
Regardless of whether you plan to live in the property or rent it out as an investor, home loan fees can eat away at your budget very quickly. Don’t forget to compare any fees payable before applying for your next home loan.
And if you’re considering refinancing, it’s worth noting that some lenders may be willing to waive the switching fees involved to get you on their books. It’s worth asking your new lender if they will cover your exit fees or waive their upfront fees when you refinance.
Use helpful features
Some home loans may be more basic, no-frills options, and some may come with helpful loan features that make the loan more competitive. These include:
- Making extra repayments without penalty to reduce your loan amount and pay off your mortgage faster
- An offset account to help reduce your interest payable while growing a nest egg
- A redraw facility to access the extra repayments you’ve made to your home loan
- Split home loan repayments when you cannot choose between fixed or variable rates
And speaking of home loan fees, it’s worth noting that many providers that offer helpful features may charge fees for the privilege compared to a no-frills home loan option. This is not always the case, so it’s still worth looking for low or no-fee options. But it may be an inevitability that you pay an annual fee, for example, if you’re prioritising home loan features in your comparison.
Choose the right lender
When comparing home loans it’s also crucial that you choose your lender carefully. Previously, Australians have had limited choice about the type of home loan lender they could choose to bank with. Nowadays, there are many more options than the traditional institutions of days past.
Bigger banks may offer more options in terms of financial products all in one place, such as a credit card and transaction account. They may also provide greater access to branches, which can be a lifeline for customers that rely on face-to-face customer service. They also have a strong reputation as being safe and secure, which some customers may prioritise if they worry about a bank going under.
However, smaller lenders, like online lenders, tend to have fewer overheads by not providing branches. This allows them to pass on these savings to customers in the form of lower rate or lower fee home loans.
Smaller lenders may also be more innovative in their digital offerings and fintech. By having fewer executives to account for and less red-tape, they may be able to roll out new features and technologies faster to their customers.
Find a loan that suits your circumstances
Standard home loans may not suit your personal financial circumstances, and it is worth comparing your options if you are self-employed or a business owner. If you apply for the wrong type of home loan and your application is rejected, this can hurt your credit score and impact your chances of future loan approval.
Instead, do your research and ensure a lender is offering a mortgage that suits your financial situation. Alt-doc, or ‘alternative documentation’ home loans may better suit you if you do not have the documentation required for a standard home loan, such as a PAYG summary or pay slip from an employer.
Common home loan traps
There are several common home loan traps that anyone can fall into, from first home buyers to seasoned property investors. Comparing your home loan options may help you prevent these mistakes, including:
- Staying loyal to your childhood bank – chances are that across the entire home loan market, there may be more competitive home loan options available than the one your childhood bank is offering. Don’t get stung with a loyalty tax – look at more than one home loan option before signing on the dotted line
- Extending your loan term – The longer your home loan term, the smaller your monthly repayments but the amount of interest you’ll pay over the life of the loan. While 40-year home loans may sound enticing for your monthly budget, don’t underestimate how much more you could pay in interest with a longer loan term. Further, if you’re refinancing to a new mortgage, check your new loan term is not longer than it was with your old lender, as this can also cost you in interest charges.
- Introductory rates – Some home loan lenders will offer lower introductory, or ‘honeymoon’ interest rates to entice borrowers to join with them. These rates may then revert to a higher-than-average standard variable rate, costing you more over the life of the loan than if you just compared lower rate options.
Help! I’ve already chosen a lender and I want to switch
If you’ve already been repaying your mortgage for a few years now and no longer feel it is the best fit for your goals or financial situation, it may be worth considering refinancing to a more competitive option.
Homeowners should know that the refinancing process can take some time, and may cost you in switching fees. But as mentioned above, lenders may be willing to waive your switching fees. But the process of refinancing does not happen overnight. And this is for your benefit as well, as you want to make sure you take the time to thoroughly compare your new home loan options before you begin the loan application process.
Comparing home loans is not only valuable for your first mortgage, but for when you need to refinance as well. Please read our Refinancers Guide for more detailed information about the refinancing process.
How to compare home loans
Choosing the right home loan is simplified when you know what features to compare. Here are some of the most important factors to review when choosing your first or next home loan.
|Home loan feature||About|
|Interest rate||The interest rate charged on top of your principal owing. This is calculated daily and charged monthly.|
|Comparison rate||Made compulsory in 2003, this is a more ‘true to life’ rate that takes into consideration the interest rate and most of the fees charged. It is based on a $150,000, 25-year home loan, which is smaller than modern home loans. However, if a home loan has a much higher comparison rate than its advertised rate, it is a good sign the lender is charging several costly fees.|
|Fees||Can include anything from:
● Application fees
● Mortgage registration fees
● Lender’s Mortgage Insurance (LMI)
● Valuation fees
● Monthly service fees
● Annual fees
● Additional repayment fees
● Late payment fees
● Fixed rate break fees
|Repayment type||Choose between interest-only repayments – a popular option for investors to keep expenses down – and principal and interest repayments. The former may mean lower repayments for a fixed period, but by not reducing your principal you will find that once this interest-only period ends your repayments are much higher.|
|Interest rate type||Fixed rate home loans involve you locking in your rate for a fixed period, typically 1-5 years. This offers certainty in your budget and protects your repayments from rate hikes.
Variable rate home loans are subject to market fluctuation. If the Reserve Bank of Australia hikes the cash rate, your interest rate may rise too. But if they cut rates, your repayments should be cheaper.
Split loans allow you to split your interest rate type between fixed interest rate and variable interest rate repayments. This doesn’t have to be 50/50 but can be, say, 70% variable and 30% fixed.
|Features||Home loan features may offer you more flexibility. These may include making extra repayments without penalty, an offset account, a redraw facility or splitting your home loan rate.|
There are so many reasons that Australians should compare their home loan options before they sign up for something that doesn’t best suit their financial situation and goals. Not only can you save thousands in interest charges and fees this way, but you can make sure you’re aligning with a lender that works for you.
For more information about comparing Reduce Home Loans mortgage options, please don’t hesitate to call us on 1300 733 823.
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