For the majority of home buyers, their home will be the biggest purchase they ever make. However, as most buyers don’t have hundreds of thousands of dollars lying around to allow them to buy their new home outright, applying for a home loan is their only option.
Unfortunately, comparing home loans can seem somewhat daunting. With so many options on the table, each charging different rates of interest and an intimidating range of fees, finding the right home loan can seem like a bigger task than finding the right home to buy.
With that in mind, we’ve put together a need-to-know on home loans. Here you’ll find all the essential info on home loans, including types of home loans, tips on getting approved, and how to get the most out of the home loan you choose. Let’s get into it!
What is a Home Loan?
Home loans are available from a wide range of lenders, including banks, building societies, credit unions and other financial providers. In its most basic form, a home loan is loan designed to provide home buyers with the funds they need to buy property.
When applying for a home loan, the borrower states the amount needed to cover the cost of purchasing the home, along with various other costs, such as stamp duty and conveyancing fees. The borrower then decides on the type of home loan needed and how long the loan term will be, as well as any features that might be useful.
As part of the loan agreement, the home loan provider agrees to lend this total amount to the borrower, with a rate of interest applied to the loan. The borrower will repay the total amount borrowed (the principal), alongside interest that accrues on the loan, plus any fees that apply.
Once the home loan has been approved, the borrower will then repay the loan over a number of years. At the end of the loan term, the home loan will be paid off, and the borrower will have full ownership of the property.
Types of Home Loans
Choosing the right home loan means understanding the various type of home loans available. For most home buyers, that means choosing between a fixed rate home loan and a variable rate home loan.
- Fixed Rate Home Loans: A fixed rate home loan has a fixed rate of interest, with loan terms ranging between one and fifteen years. With a fixed rate home loan, buyers know exactly what their repayments will be over the length of the loan. This can make budgeting easier, and it can protect against interest rate rises. However, fixed rate home loans may attract a higher rate of interest than variable rate home loans, and may not offer the same range of features.
- Variable Rate Home Loans: A variable rate home loan has a variable rate of interest, so repayments could increase and decrease over time. The interest rate applied to the loan is determined by the lender, but it usually follows market fluctuations. Variable rate home loans could allow borrowers to save money on their loan if interest rates fall, but they could end up paying more if interest rates rise.
- Split Home Loans: Borrowers may opt to split their home loan, so that part of the loan is fixed, and the other part attracts a variable rate.
- Home Loan Features: Home loans can offer borrowers a number of useful features. It’s worth bearing in mind that not all borrowers need these features, so it may not be worth paying more for them if they’re not being used.
- Repayment Flexibility: The ability to have repayments on a monthly, fortnightly or weekly basis. By paying fortnightly or weekly, the borrower may repay the loan faster and save money on interest by paying more repayments per year than on a monthly repayment basis.
- Extra Repayments: A home loan that allows extra repayments could allow the borrower to repay the loan faster and save on interest.
- Offset Account: An offset account is a savings or transaction account linked to the home loan. The account balance is taken off the amount owed on the home loan, helping the borrower to save money on interest.
- Redraw Facility: With a redraw facility, the borrower can pay more into the home loan, to then redraw later if needed. The extra money paid into the loan helps to reduce the loan balance, lowering the amount of interest paid out.
Tips: Getting Approved for a Home Loan
- Determine What Type Of Buyer You Are: When choosing a home loan – or even comparing home loan options – it’s important to know what’s available, in order to work out which type of loan is best for you. However, you also need to know what type of buyer you are. Whether you’re a first home buyer or you’re refinancing a current home loan, whether you’re a renovator or builder, or even an investor, this will determine the type of home loans you should be looking at.
- Work Out How Much You Can Afford: Applying for a home loan means committing to that loan for up to 30 years, so it only makes sense to choose one that’s affordable. When working out how much you can afford to borrow, use a home loan calculator and be sure to take into account all extra costs. These can include:
- Lenders mortgage insurance (a type of insurance required by a lender if the borrower has a deposit of 20% or less of the total loan size),
- Stamp duty,
- Conveyancing/legal fees,
- Mortgage fees (upfront fees a lender might charge at the start of the loan, such as application fees, documentation preparation fees and bank valuation fees),
- Council, water and strata rates,
- Home insurance,
- Moving costs,
- Compare Home Loans
Sticking with the provider you’ve banked with all your life may not be your best option. Loyalty isn’t always rewarded, so it’s a good idea to compare home loans, checking out a number of providers, and what their loans will cost overall.
- Check Your Credit File
When you apply for a home loan, lenders will check your credit file to assess your credit worthiness. Apply for a copy of your credit file before applying to see what it says about you. You may need to build your credit rating if you have a history of bad credit. Proving a good savings history can also make your application more worthy in the eyes of a lender, as can a substantial home deposit.
Pros and Cons of Home Loans
Weighing up the options on a new home loan often means thinking about the pros and cons on offer.
Home Loan Pros
- A home loan can allow you to purchase property you can’t afford to pay for upfront.
- With a variety of home loans on offer, comparing the options can allow you to choose the loan that is most beneficial to you.
- A fixed rate home loan could make budgeting easier, while protecting against interest rate rises.
- A variable rate home loan could allow you to save money on your loan, if interest rates fall.
- Home loans can offer a number of handy features, helping you get the most out of your loan, while possibly saving you interest to repay your loan sooner.
Home Loan Cons
- If you don’t know what to look for – or what you need – you may choose the wrong loan.
- A home loan is a long-term commitment, so if you choose the wrong loan or lender, it could result in you paying more for that loan, or paying fees to get out of it.
- It can be easy to stick with lenders you are familiar with, or big banks you have banked with for years, but this may not provide the best loan for your needs, and it may be a costlier option.
- Some borrowers ‘set and forget’ their home loans, when refinancing could offer them a better deal.
Getting the Most out of your Home Loan
So, now you know about the various types of home loans available, it’s time to find out how to compare the options and get the most out of the loan you choose.
- Advertised Rate vs. Comparison Rate: When comparing home loans, use the comparison rate rather than the advertised rate. The advertised rate is the percentage of interest the lender will charge you on your loan, while the comparison rate takes into account the majority of the loan’s fees and charges. This helps you understand the true cost of the loan.
- Repayment Frequency: Consider choosing a fortnightly or weekly repayment schedule, instead of a monthly one. With more repayments per year, a fortnightly or weekly schedule could allow you to save on interest overall, and pay off the loan quicker.
- Find a Balance: The key to choosing the right home loan is finding a balance. This means choosing a monthly repayment schedule that is affordable, taken out over the shortest period of time. It also means finding a home loan that offers features that you will use, for the lowest cost overall.
- Save for a Deposit: Most borrowers are advised to save at least 20% of their property price as a deposit. While this may not always be achievable, it does provide a good loan-to-value ratio, creating a repayment schedule that should be more affordable, while making the loan seem more favourable to potential lenders.
- Refinance: Borrowers are recommended to re-evaluate their home loan every two years. By comparing their current home loan with home loans available elsewhere, they may find an option that offers better features at a lower cost.
Time to compare home loans! Now you know what to look for, check out all the options on Credit World and find the best one for you.