.Top home loans
Home loans are no longer just about signing up for 25 years and making regular loan payments – nor even just about trying to pay off the mortgage as quickly as possible. Flexibility and peace of mind are just as important, and there are a range of loan options that offer such benefits. However, these extras can cost money, and the key feature is still the interest rate.
Types of home loans
There are three main types of home loans:
1. Basic loans
These are no frills loans with few features and a low interest rate. May offer redraw but there can be restrictions and fees so a basic loan may not suit you if you want to make extra repayments and access them later.
2. Standard loans
These offer more flexibility than basic loans, you can redraw any extra money you've paid in, for example, and have the option to switch to a fixed rate, or split the loan into a fixed and variable portion. They also often offer a 100% offset account. "An offset account is a great option because then you can put your savings and even your salary towards the loan, every cent counts," says Mitchell Watson, Research Manager from CANSTAR. But this comes at the cost of a higher interest rate.
3. Home loan package
A home loan package is a standard loan with an interest rate discount of up to 1.2% depending on your loan amount, cheaper than many basic loans. The package normally includes a free transaction account and no annual fee credit card. However, high package fees apply of up to $400 per year.
With some great rates around at the moment there's a lot of competition between lenders, so don't be shy to ask your bank for a better deal.
"Even negotiating, say half a per cent lower rate on a $300,000 home loan over 25 years can save you almost $90 per month and more than $25,000 over the life of the loan," says Justine Davies, CANSTAR Finance Editor. "Alternatively, if you negotiate a lower rate and keep your monthly repayments at the original level, you can potentially knock years off the life of your loan. That's money for nothing; it's money that some borrowers are currently handing their financial institution on a silver platter."
Fixed or variable
At a time of historical low interest rates, low fixed rates sound tempting. But they can come with the downside of reduced flexibility. High break costs apply if you want to repay the loan early or relocate and you are often not allowed to make extra repayments.
While the RBA kept rates steady in 2014, it is very hard to predict if you'll save with a fixed rate over the next three or five years. "We had a look back over the last 20 years and we found you had a 50% chance to be better off with a fixed rate loan," says Watson.
Ask yourself if you can afford higher rates, if not, fixing at least part of the loan could be a good option for you. A split loan offers the best of both worlds allowing you to make extra repayments in the variable portion of the loan and still giving you the security of a fixed rate.
Watch the fees
Interest rates are just one of the costs to consider. You should also check the regular fees and charges. Fees and establishment costs can make a big difference to the amount you pay for your mortgage.
The comparison rate takes into account these charges, making it easier to compare loans.
Some common fees include:
- Application fees: lenders may charge an upfront establishment fee and application fee. Ask the lender to waive these fees, or at least try to negotiate a discount.
- Valuation fees and lender's legal fees: lenders may also charge for a valuation of the property. If you're concerned you may not meet a lender's income requirements for the loan, ask them to check first, before going ahead with the valuation, as you may have to pay for the valuation even if your loan doesn't get approved.
- Lender's mortgage insurance (LMI) can apply if you don't have an 20% deposit, and it can cost you thousands of dollars. It doesn't insure you but rather the lender (in case you default on the loan). It doesn't even absolve you from the debt – the insurer can chase you for it. Try to have as high a deposit as possible; even a small difference in the deposit can make a difference in the LMI cost.
- Monthly or annual fees: high ongoing fees can have an impact on how fast you can pay back the loan.
- Break costs: fixed-interest loans can have high exit fees, especially if the variable interest rate is lower than the fixed rate you're paying. If you want to get out of the mortgage, you may have to make up all the 'lost' interest the bank would have made if you'd paid the higher rate through to the end of the fixed term. This is called the 'break cost'.
Features to look for
- Extra repayments: Some loans – particularly those with a fixed interest rate – may limit the amount you can pay without getting charged a break fee.
- Redraw facility: With many loans, if you make extra payments you can get the money back later. This can have considerable tax advantages and provide useful security as you can store your savings in your mortgage. Some redraw facilities are much easier to access than others – check whether you'll be required to apply in writing, how long it might take for approval to come through, and the costs involved.
- Repayment holidays: Some mortgages allow you to take a 'repayment holiday' for a short period such as six months, for example if you've just had a baby. Check the conditions, as sometimes you can only make use of this features if you've made extra repayments, or you may have to make higher repayments after the repayment holiday to make up for it.
- Interest only: Paying interest-only can be a useful feature for investors. It's usually available for five years but some loans offer it for up to ten years. It's risky though, as generally you'd want to pay back the loan as quickly as possible to minimise interest charges and avoid owing more than the property is worth in case of a market downturn.
- Mortgage offset accounts: You deposit money into an account and instead of receiving interest on it, you receive a reduction in the interest due on your loan. Because offset accounts don't actually pay you any money, they don't add to your taxable income – so, like redraw facilities, they offer tax advantages.
For some features offered to first home buyers such as no-deposit home loans, family guarantees and 40-year home loans, check our report on risky home loans.
Still confused? A good mortgage broker may be able to help.