There are a few decisions in life that outweigh all the others. Getting married and starting a family are two – but taking out a home loan is right up there as well. The thing is, with so much happening in the Australian property market, the lending space has also gone through considerable change - leaving many borrowers unsure of where they stand, or where to start. Sometimes you need to strip things back and talk about the basics, so here are a few starting points any borrower should know before looking to get a loan.
What type of loan should you go for?
To find the right loan you have to understand the features so you can accurately decide what is best for you. There are lots of different types of loans, so it’s important not to get overwhelmed. Some loans might cost less initially but cost more over time, while others have annual fees, but the features give you flexibility to save. So, to help you understand the different ends of the scale, let’s talk about basic loans and fully featured loans.
Basic loans generally don’t come with any frills. The most appealing aspect of a basic loan is the low interest rate. These loans are easier to set and forget as you make regular repayments over the term of the loan. However, it’s often difficult or may be more costly if you want to make extra repayments further down the line or extend the loan because your financial position changes.
Fully featured home loans sit at the other end of the scale. These may still have competitive interest rates, but will most likely include an annual fee but with added features like free redraw or an offset facility. The benefit is that fully featured home loans give borrowers more freedom in the way they manage their money. For example, the functionality of an offset account could allow a borrower to use spare funds to reduce the interest they would otherwise have to pay.
How big does my deposit have to be?
The size of the deposit will vary depending on how quickly you want to get onto the property ladder. If you are in a hurry the minimum deposit you need is 5%, however this will incur the added cost of lenders mortgage insurance (LMI). Typically, any deposit less than 20% of the purchase price will require LMI. This is a one off premium paid by the borrower that protects the lender in the event they default. The good news is you don’t have to have the cash saved to cover this cost. Most lenders will allow you to add the cost onto your loan amount, so you can pay this expense off over the life of the loan.
Besides the interest rate, what other costs are there?
The other important elements to consider when choosing a loan are the fees and charges. There is no use having a dirt cheap interest rate, if you are getting hit with hefty application and ongoing fees. A good way to compare the true cost of different home loans is to ask your prospective lenders for a Key Fact Sheet or grab one from their website. This will incorporate most fees and charges and provide you with a comparison interest rate that reflects the true cost of borrowing the money.
It’s important to remember that Key Fact Sheets do not take into consideration things like lenders mortgage insurance costs, government stamp duty and legal costs, pest and building report charges and ongoing council and water rates.
Is now the time to choose a fixed rate?
The decision to fix or not to fix your home loan interest rate really comes down to each of us as individuals and how much financial risk we are willing and able to take. A fixed interest rate loan allows you to lock in at an agreed interest rate for a term that is usually between 1 and 5 years – while a variable rate will move when the cash rate moves. An alternative option is to get the best of both worlds and split your loan between a variable and fixed rate portion.
If you’re still not sure about what might be best for you, get the best advice and call 13 11 33 and speak with your local Liberty Adviser.