Navigating the world of home loans can be a confusing business, especially for first home buyers. The money lending industry is more complex than ever before, which can make finding the right home loan for your circumstances a difficult task.
This article aims to clear up some things about home loans so you have a good understanding of what’s on offer and what’s right for you before you make any major decisions.
Types of Home Loans
You can generally access three types of home loans which each have their benefits and downsides:
- Basic – These offer low fees and a simple structure but have fewer features and less flexibility.
- Standard – These loans offer flexibility with features such as choosing between fixed, variable and split rates, offset accounts and redraw facilities. The trade-off is that they tend to have higher interest rates than basic loans.
- Packages – This involves bundling your home loan with other financial products from the lender such as a savings account and a credit card, which allows you to access a discounted interest rate. However, you do get charged annual fees of up to $400.
It is essential to carefully examine the fees in each home loan you look at. Don’t make the mistake of focusing entirely on interest rates only to find yourself paying big monthly fees, application fees, break costs, valuation fees and other costs.
Understand Your Buying Capacity
The amount you can borrow will vary from lender to lender. Lenders assess your buying capacity by looking at a number of factors relating to your financial condition, including:
- Current assets
- Living expenses
- Credit history
- Current debts and other financial commitments
- How much you can deposit (if below 20 per cent, you will typically have to purchase Lenders Mortgage Insurance)
Use our online calculator to determine your buying capacity before looking at property so you know how much you can borrow and comfortably repay.
Fixed or Variable Rate?
Fixed home loans have an interest rate that is fixed for a certain period of time, generally one, three or five years. Once this term is over, the loan will switch to the variable rate offered by the lender. Fixed rates are better for budgeting and security but can have break fees and you run the risk of missing out on a rate drop.
Variable home loans have a rate that is adjusted by the lender to fluctuate in a similar fashion to the RBA interest rates. These loans tend to be more flexible with more features like a redraw facility and the ability to break, refinance and make extra payments. The trade-off is uncertainty and higher costs when the rate hikes.
Many lenders offer the choice to split the loan, so you can keep part of it fixed and the rest on a variable rate. This allows you to strike a balance in managing the risks while still being able to access flexible loan options.
You don’t always have to see a home loan through to the end. You can refinance your mortgage if you find a better deal, which can save you thousands in interest. However, you have to carefully look at the costs involved to ensure you don’t incur unnecessary or exorbitant fees.
Potential costs include exit fees, break fees, start-up fees and Lenders Mortgage Insurance (if your loan is more than 80 per cent of the current value of your home). Ensure you look at the lender’s Key Facts Sheet and tell your current lender that you are considering switching as they may offer a better deal to keep your business.
Got More Questions? Speak to Our Mortgage Brokers
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. Our friendly mortgage brokers can help you get the best deal possible and ensure you avoid financial pitfalls.