The money lending industry has become increasingly competitive and complex, especially when it comes to home loans. While this means we have more choice and beneficial innovations to take advantage of, it can also make choosing a mortgage a daunting task.
The team at Kaboodle will walk you through all the factors you need to consider to make the right choice when shopping around for the best mortgage.
The Basics: Home Loan Types
The first thing to understand is that there are three broad types of home loans these days: basic, standard, and packages.
- Basic loans offer few features and little flexibility, but they have the appeal of low fees and simplicity.
- Standard loans have higher interest rates than basic loans, but they also offer more flexibility with features like offset accounts, fixed, variable, or split rates, and redraw facilities for extra payments you make.
- Home loan packages allow you to bundle your mortgage with other financial products from the same institution; mortgage, savings account, and a credit card is a common package. As a reward for throwing your lot in with them, lenders offer interest rate discounts of up to 1.2%. However, packages often cost around $400 in annual fees.
Is Fixed or Variable Interest Right for You?
Deciding between fixed and variable interest rates will depend largely on your financial situation and on your level of risk-aversion. A fixed rate is best for those who crave stability and predictability in their financial life. It’s also the best option if your budget for mortgage repayments is fairly tight; you may not be able to handle the swings that come with a variable rate.
Beware the Fees
Examine every mortgage offer carefully, paying attention to total cost including fees, not just to interest rates. Don’t be afraid to ask for a better deal – lenders are often willing to offer interest rate discounts or waive some fees to get your business, especially if you’re borrowing a large amount.
Fees to Look Out For
- Application fees – up-front fees charged to apply in the first place.
- Valuation fees and lender’s legal fees – lenders will want to do their own valuation of your home and they’ll charge you for the privilege. Be sure you’re eligible for a loan before they value your home, otherwise you’ll end up paying the fee without even getting the loan.
- Lender’s mortgage insurance (LMI) can apply if you don’t have a deposit of 20% or more, and it can cost you thousands of dollars.
- Monthly or annual fees are sometimes asked for on top of interest and principal repayments. Make sure you’ve budgeted for these!
- Break costs – if you break your mortgage early you may have to reimburse your lender for some or all of the interest payments left on your loan.
Look for Desirable Features
There are a range of features that can make a home loan more flexible and save you money. These features may make up for a higher interest rate, and the lack of them might sour what seems like a bargain.
- Can you make extra repayments? Some lenders won’t allow you to make extra repayments because they lose out on interest.
- Can you redraw? If you can make extra repayments, find out whether you have the option to redraw these funds. Being able to do so means you have a fall-back if you make extra payments then hit hard times; you can also use your mortgage as a savings account, netting you significant tax advantages.
- Do you get repayment holidays? Some mortgages allow you to take a ‘repayment holiday’ at certain times, such as if you’ve just started a family.
- Can you use a mortgage offset account? Mortgage offset accounts are linked to your mortgage, and the money in the account reduces your interest rate. A 100% offset account will reduce the principal on which interest is calculated, for example, $20 000 in the account would mean you only pay interest on $180 000 of a $200 000 loan. Partial offset accounts work differently – the interest you would accrue on the money in the account is instead used to chip away at your principal loan amount, reducing your effective interest rate as it does.
If you have any questions or wish to find out more about how to apply and get started, simply get in touch with Kaboodle Finance.