Choosing a mortgage has become more and more difficult as the lending industry becomes increasingly competitive and complex.
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 (P&I) repayment methods. The fees and features offered by each lender differ and there are a multitude of variations available to suit your needs.
Factors to consider
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.
Michael Tsoa-Lee, director at Mates Rates Mortgages, believes structure is all-important. "Structure is the first thing to get right before you choose your rate or lender," he says.
"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.
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.
"It's also worth checking if you can re-fix your interest rate at no extra cost or split your loan to suit your situation. Other features to bear in mind are offset accounts and loan portability," Bonaventura says.
Tips for finding the right lender
Bonaventura suggests researching a lender and asking a few questions before deciding on a loan.
"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 lender is from someone who already deals with them and recommends them."
Bonaventura adds that you should also ask about 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," says Bonaventura.
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.
Bonaventura says the best way to do this is simply to ask for them. "Lenders are obliged to provide and explain the nature of this information," he says.
When meeting up with a lender, Tsoa-Lee suggests 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 ?if you say exit fees, they may not tell you about discharge, break or settlement fees. This is where you have to be very particular with your questions," he advises.
If you shop around, it's possible to find lenders with good rates, low fees and flexibility. What a lender offers you the first time isn't necessarily their best offer.
How useful are comparison rates?
Comparison rates help consumers identify the true cost of a loan. It's the rate that includes both the interest rate and fees and charges relating to a loan, reduced to a single percentage figure.
Bonaventura suggests that a comparison rate can be a very handy tool in understanding the
true cost of a loan.
"Consumers should always take note because while a bank or financial institution may advertise what appears to be a very low rate, the comparison rate represents a ‘truer' rate for want of a better word," he says.
"Therefore, a competitor with a higher advertised rate and a lower comparison rate could be a cheaper option over the term of a loan."
Tsoa-Lee says that comparison rates are useful, but warns homebuyers to 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.
"They're a good starting point, but the risk of comparison rates is that they do get polished ?you need to know the exact structure of your loan and compare that information, otherwise you're barking up the wrong tree," says Tsoa-Lee.
Should you use 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," says Tsoa-Lee. "The challenge is choosing the right broker.
"They should work out the structure with you, then give advice on a range of loans. They would then work through each lender until they find something you're comfortable with," he continues. "Before you contact a broker, check they're registered with the Australian Securities & Investments Commission."