Getting a home loan is one of, if not the most important task homebuyers should do to move forward in their home-purchase journey. With so many options currently available, what should they do to navigate the home-loan market efficiently?
There are four essential things borrowers should consider when looking for the best home loan, said market watcher Kassia Byrnes in a think piece in Business Insider Australia.
The loan’s interest rate is one of the factors. Given the low interest-rate environment, borrowers must compare interest rates from different lenders to determine where they could save more.
"There may not be a huge difference between the interest rates on the home loans you're researching, but even a 0.5% difference could mean thousands of dollars added or saved by the time you finish your repayments," Byrnes said.
Borrowers also need to check whether a variable or a fixed rate would be a better fit given their current financial health. Aside from the interest rate, borrowers should look into the type of loan — will they go on a principal-and-interest or an interest-only basis?
While it could be attractive to take an interest-only loan initially given the lower monthly repayments on a certain period of time, it has its downsides.
"However, you're also not making any dents in the principal amount you borrowed. So once that interest-only period is over your repayments will go up again," Byrnes said.
Additionally, the loan's term will define how much savings borrowers would get. The shorter the loan term is, the lesser interest will be charged. One disadvantage with this is borrowers will need to pay higher repayments that could considerably dent their monthly budget.
On the other hand, a longer mortgage term will charge less monthly. In the long run, however, interest will accumulate, and borrowers would end up paying a substantial amount of loan charges.
"You'll need to review the loan term on each home loan and decide what time frame makes the most sense to your financial situation," Byrnes said.
One last thing that could help make things easier for borrowers is the set of features home-loan products have.
"Features can include options like an offset account which helps reduce your interest payable, a redraw facility which allows you to access any extra money you've paid towards your mortgage, and a line of credit loan which allows you to use the same account for your mortgage repayments and everyday spending," Byrnes said.
However, these added features always come at a cost — borrowers need to analyse if these could actually help them in the long run before getting them.
"Considering these four factors when you're deciding on a home loan will help you wade through all the options out there and ensure you pick the best one for your own circumstances," Byrnes said.