Choosing Your Home Loan

Interview with Loan Solution Expert: Don Farquharson

“Finding the right loan option isn’t just about your interest rate.”

Q: How do I choose the right home loan?

A: Many first home buyers rush into the decision of choosing their home loan. Often times they go to the lender that they do their every-day banking with simply because it's the easiest option. 

This can be a big mistake. Your home loan will demand a significant amount of your income for a number of years. You need to make an informed decision. The right loan option can save you thousands of dollars, but finding the right loan option isn’t always about your interest rate. You need to consider and compare a range of features between lenders.

1.     Interest Rates

2.     Variable and Fixed Interest Rates

3.     Lenders Mortgage Insurance (LMI) and Lender Costs

4.     Flexibility in Policy

When you consult with a finance broker the comparison process is handled professionally and a lot of confusion and margin for error is removed from your decision. Brokers even have the leverage to negotiate with your lender to get you an even better deal. This being said, whether you seek advice from a broker or not, it's still extremely important for you to understand all of the features of your home loan.

Q: What is a good interest rate?

A: When it comes to what is a good interest rate there is no clear-cut answer. Depending on the fluctuating market, lender competition and your particular circumstances, a good interest rate can fall between 4 and 5% p.a. On rare occasions particular lenders will offer interest rates below 4%, and usually in these circumstances we advise our clients to pounce upon them. 

But as always, pausing to compare your loan options is extremely important. You may find an excellent interest rate, and then discover that the lender charges higher Lenders Mortgage Insurance, or other fees and costs.

Q: Should I choose a Fixed or Variable rate home loan, or a combination of both?

A: If you think rates will rise, then choosing a fixed interest rate may be a good option.  Fixed Rate Loans generally don’t have as many features as a Variable Rate Loan though.  If rates fall, you may find that to repay your fixed rate loan, you may have to pay significant penalties. You can lock in fixed rates for terms from 1 to 15 years.

Variable interest rates allow you to repay your loan at any time without penalty, and you can have attached to your loan other features such as Redraw of early repayments, and 100% Transaction Savings Accounts.

Alternatively, you can choose a combination of both fixed and variable rates on your home loan which gives you both some surety of your repayments, some flexibility and some great features.

Q: What is Lenders Mortgage Insurance and what lender fees and costs will I have to pay?

A: Lenders Mortgage Insurance (LMI) exists to compensate the bank in any situation where they make a loss on your loan. Generally when your deposit is less than 20% of the purchase price you will need to pay LMI.

LMI is a one off cost that is added to the loan amount and is then factored into your interest and repayments.  By paying LMI, you only need to contribute as little as 5% of the purchase price plus your other costs. With the help of a broker you may be able to avoid this cost.

On top of LMI your lender may charge upfront fees such as an application fee and a settlement / documentation fee. There might also be ongoing fees depending on the loan package you choose.

                                                                               

Q: What does flexibility in policy mean?

A: If you have difficulty saving, have bad credit history, or have just started a new job, it can be very difficult to get a home loan. Sometimes the most important factor when looking for the right lender can be how flexible their policies are considering your individual situation.

Q: Is there anything else I need to consider?

A: Yes. There are lots of things to consider when choosing your home loan and not all of them are to do with pricing. If you like face-to-face banking you will want a lender with a branch near you; or similarly if your transactions are all electronic, you may prefer a lender with a good internet banking platform. There are a range of factors, some more important than others. But the key to success is comparison.

Make your decision an informed decision. All About Loans is very happy to provide free advice.

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