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Choosing a mortgage has become more and more difficult as the lending industry becomes increasingly competitive and complex. Getting the right home loan the first time could save you thousands of dollars in repayments, fees, and interest.

Home loans are available in many different variations. There are introductory, fixed, and variable rates offered by hundreds of lenders, with interest-only or principal & interest repayment methods. The fees and features offered by each lender differ and there are a multitude of variations available to suit your specific needs.

If you are a first-home buyer, it is especially important for you to go into the process armed with the knowledge in terms of rate types, loan features, and other options — this will ensure you that every dollar you spent will be worth.

This guide shows you all the things you need to know in choosing a home loan.

What factors to consider when choosing a home loan

The golden rule is to consider the whole package offered and not to look at one aspect in isolation. If a loan has a very low interest rate, the chances are the fee structure is high. Similarly, if there are lots of features attached to the loan, you'll usually pay for them via higher interest rates or more fees.

Remember, structure is the first thing to get right before you choose your rate or lender.

In order to get the right loan, it's also important to ask yourself what your finance needs are and what features you really need.

Depending on whether you're a first homebuyer, second homebuyer, are self-employed or thinking about renovating, refinancing or investing, your loan needs to accommodate your individual circumstances.

If you're buying your first home, your loan needs to be easily manageable, especially in your first year. Home loans have many different features, and it's important not to judge a home loan solely on the interest rate and upfront establishment fees.

Another structural point to consider is the size of deposit you can afford. Most mortgage providers will only lend 80% loan to value ratio (LVR) unless you're willing to pay for lenders mortgage insurance (LMI), which can cost up to several thousand dollars. There are lenders who'll provide up to 100% LVR without LMI, but it will usually mean a higher interest rate or greater fees.

When you've decided on the deposit, you can isolate the home loans that best suit your needs.

What features to look for

Not every feature available in a loan package will suit your needs, but the more flexibility you can achieve, the better, especially if your individual circumstances change.

Here are some of the features you should look for in a home loan that can be useful in any circumstance:

Ability to make additional repayments

Making additional repayments will help you save on your home loan in the long run as these top ups go directly on your principal. However, make sure that your lender does not charge for extra repayments.

For added convenience, ask your lender if you can make repayments via direct debit, ATMs, internet and phone banking services.

Option to fix or split your loans at no extra costs

Fixing your rates can give you certainty as your repayments remain the same monthly for a period of time. This can be helpful if you want to be strict on your budget.

When choosing a home loan, ask your lender if they can allow you to fix your whole loan or just a portion of it for free. This will help you tremendously in planning for your budget.

Offset accounts

An offset account can help you save on interest costs — it works like a high-interest savings account where funds are accounted daily against your loan balance. This way, the amount of principal being charged with interest is reduced.  

Loan portability

Loan portability is also an important feature, especially if you think you might be selling your property to upgrade into a bigger one over the next years. Portability will help you keep your existing facilities linked to your home loan and avoid new establishment and applications fees.

What comparison rates tell you about the loan

Checking the comparison rate or a home loan can give you an idea how it differs from other loans in the market.

Comparison rates help consumers identify the true cost of a loan. It is the rate that includes both the interest rate and fees and charges relating to a loan, reduced to a single percentage figure.

Consumers should always check the comparison rate because while lenders may advertise what appears to be a very low rate, the comparison rate represents the “truer” cost of the loan.

Therefore, a competitor with a higher advertised rate and a lower comparison rate could be a cheaper option over the term of a loan.

However, while comparison rates are useful, homebuyers should be wary of comparison rate polishing. Comparison rate polishing is when the lender only includes set fees in the comparison rate calculation and may introduce variable fees on top of this. This makes it crucial to find the right lender and ask specific questions to know all the nooks and crannies of a home loan.

How to find the right lender

If you already have a trusted lender, it might be best to start to ask them for information about home loans. Not only will this be convenient, it will also save you time and effort as you have already been transacting with your bank for different purposes.

However, it is also important to check what other home loan products are on offer in the market.

If you think you can find better and more competitive mortgage products outside your bank, then try searching using mortgage comparison sites.

Find out as much as you can about them either from their website or by word of mouth. Often the best way of finding the right home loan lender is from someone who already deals with them and recommends them.

One thing you should also ask your lender about is how post-settlement issues are handled. Does the lender have customer service consultants readily available or are these matters dealt with by a call centre or message service?

Having ready access to decision makers can save you time and a deal of stress down the track.

Another crucial thing is transparency — many first homebuyers are confused and overwhelmed by the huge array of home loans available. They are often left feeling bewildered and unable to make an informed decision.

To overcome this, you'll need to make a loan transparent, and understand all the costs and benefits before choosing.

Lenders are obliged to provide and explain the nature of loan information, so do not hesitate to exhaust all the questions and concerns you might have.

When meeting up with a lender, it is suggested that you ask about the total fees associated with the mortgage. Ask what fees are likely to be payable, not just what are payable.

Most people move out of their loan after three to five years, so you need to ask what costs are charged when exiting between the third and fifth years. You must ask them to set out all the fees.

Be specific and when asking questions — some lenders for instance, might have a different definition of exit fees, which could be entirely different from discharge, break, or settlement fees.

If you shop around, it's possible to find lenders with good rates, low fees, and flexibility. Remember that what a lender offers you the first time is not necessarily their best offer, take what they say, do your research, and see what is best for your current financial situation.

Reaching out to a mortgage broker

If you're unsure that you can find the best deal without advice, then you might consider using a broker.

There are hundreds of brokers across the country and most have access to a wide variety of loans and have the experience to ask the right questions of lenders.

Brokers are useful to help you get the structure right, but the challenge is choosing the right one to help you.

Before you contact a broker, check they're registered with the Australian Securities & Investments Commission. You can also ask for referrals from real estate agents, family, or even friends who recently bought a house.

 

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