Here are some key considerations when comparing home loans.
No Upfront Fees
In an ideal world, your new mortgage should have no application, valuation, legal or deferred application fees. Reality, however, dictates that there will be some upfront fees - and every lender will be different.
It's important to understand that some or all of these fees may be added to your initial mortgage balance - meaning that you will be paying interest on those fees for the life of the home loan.
No Ongoing Fees
You should also avoid monthly or yearly mortgage account keeping fees for the same reason. These fees will add to the amount that you owe and interest will apply.
Lowest Home Loan Interest Rates
Whilst the interest rate on a mortgage is a key factor in choosing a home loan, you can't look at the interest rate in isolation.
In addition to making an allowance for variations in any upfront and ongoing fees from one home loan option to the next, it is important to ONLY compare rates for home loans that tick all of your boxes.
In other words, if you need a home loan redraw facility or and/or mortgage offset account - or if you want to make regular fortnightly home loan payments instead of monthly, for example, you should not compare home loan rates that do not offer these features. Often the advertised rates are for a no-frills product with limited flexibility.
Most home loans come with a variable interest rate - meaning that it can move up and down at any time. Although they are loosely linked to the RBA Official Interst Rate, both bank and non-bank lenders will often move their rates independent to the RBA and to each other.
This is very important to remember because, potentially, the lowest interest rate home loan available today could have you paying the highest rate tomorrow.
Another thing to watch for is special home loan rates such as introductory rates or honeymoon rates.
Whilst these special interest rates may be helpful to you in the first year, the situation could be very different in 12 months time.
Principal reductions and additional payments
Your home mortgage loan should offer no restrictions or fees on any additional deposit that you make into you loan.
Making an additional, unscheduled payment on your mortgage will reduce the principal balance owing on your loan and, therefore, the amount of interest that you will pay.
Even if you redraw the over-payment/s from your mortgage at some time down the track, the interest that you will have saved on the loan will mean that your mortgage will be repaid sooner.
Unrestricted Redraw Facility with No Fees
A Mortgage Redraw facility allows you to withdraw money from your home loan.
The maximum amount that you can redraw from your loan should be 100% of the amount/s that you have overpaid your mortgage by way of additional payments PLUS the interest savings that those payments have accumulated.
You should avoid a home loan that charges you to redraw your own money!
There should be no restriction redrawing surplus payments and balances of your mortgage account. I.e unlimited transactions and unlimited value. There should be no transaction fee for a redraw.
Free Loan Splitting
Loan splitting is the ability to split the home loan into two or more accounts. Splitting a mortgage into seperate accounts provides great flexibility for debt consolidation, buying investment property, setting investment targets for superannuation etc.
Look for a home loan with free loan splitting but you should be prepared to pay as much as $100 per split or more at the time you make the split.
Mortgage Offset Accounts
A Mortgage Offset Account is a seperate bank account that sits alongside your home loan and allows you to deposit and withdraw funds. The interest earned on the offset account is typically linked to the home loan interest rate and, instead of the offset interest earned being credited to the offset account, it is credited to the home loan.
The result is essentially the same as using the mortgage account to deposit and withdraw surplus funds.
Mortgage offset accounts are typically used for tax purposes and, unless you've been given specific professional advice from an accountant or a financial planner, you should probably not bother with an offset account.
Free Product Switching
Most loans come with the ability to switch from a variable interest rate to a fixed interest rate or visa versa.
Switching interest rates between variable and fixed can result in substantial interest rate savings over the term of the loan if your timing is right.
Fixed interest rates mean fixed repayments - regardless of underlying mortgage interest rate movements - and there may be times when you would take advantage of the certainty offered by switching to a fixed rate loan.
Published: Sunday 1st August, 2021
