How to choose a home loan

Use our tips to negotiate the mortgage maze.
 
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  • Updated:19 May 2008
 

03.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, or annualised average percentage rate (AAPR) is an 'effective interest rate' that 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.
  • Valuation 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.
  • Exit penalties: check the costs for early repayment of the loan or refinancing. Many loans have no payout penalties other than normal discharge costs, but if they exist they can be steep, particularly in the early years. They can also be called deferred establishment fees or early settlement fees and can be a flat fee, several months' interest or a percentage (around 1%) of the original amount borrowed.
  • Lender's mortgage insurance: depending on how much you borrow compared with the amount you paid for your house, you may be required to take out lender's mortgage insurance. This insurance can be expensive, especially if you want to borrow up to 100% of the value of the property.

    Lenders usually require you buy this type of insurance if you borrow more than 80% of the property's value (known as the loan-to-value ratio). However, some may lend up to 85% without requiring mortgage insurance. But check if such loans come with a higher interest rate and whether you'll really be better off.

    Try to have as much of a deposit as possible, a small deposit versus no deposit can make a big difference. For example, on a $400,000 home loan, a deposit of just $20,000 (5%) could make your mortgage insurance around $4000 cheaper.

    A word of warning: lender's mortgage insurance doesn’t insure you, but the lender. It protects the lender if you default on the loan and your home is sold for less than your loan amount. The insurance will compensate the lender, but you’re still not absolved from the debt — the insurer can chase you for it.
  • Break costs: Fixed-interest loans can have particularly high exit fees, especially if the current variable interest rate is lower than the 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 had paid the higher rate through to the end of the fixed term. This is called the 'break cost'.
 

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