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Getting up to speed on comparisons of home loans and mortgages
The biggest investment many Australians will make in their lifetime is their home loan, so it makes sense to research and be the best first home buyer (or second, or third) that you can be.
Those already in the mortgage and home loan market are also faced with an array of comparisons of refinancing and investment loans. Comparing a variety of loans and finding the best home loan option means dissecting refinancing options, following information and guides about home loans, knowing the best mortgage brokers in your area and keeping up to speed on home loan product reviews.
When it comes to the latest mortgage interest rates and special introductory loans, the right home loan choice often comes down to the type of buyer you are, interest rates, home loan features and finding the lowest home loan fees.
What's the difference between a variable rate and fixed rate home loan?
The first decision you need to make as a home loan seeker is whether you want a fixed interest rate or variable interest rate home loan.
A variable rate home loan is one where the rate of interest you pay on your home loan varies according to the official cash rate which is set by the Reserve Bank of Australia. The RBA will lift or drop the official cash rate depending on the state of the Australian economy.
Variable rate loans are one of the most popular home loans in Australia because they provide plenty of competitive options for those comparing mortgages. A variable interest rate home loan can be more flexible and potentially have lower fees. At the same time, it permits lower interest repayments when official RBA rates drop, as they have done by 1.25 percentage points between November 2011 and June 2012.
Some included features of many variable rate home loans include; 100 per cent offset accounts. the ability to make extra repayments, redraw facilities and line of credit options, which allow you to dip into any equity when and if your home appreciates in value.
In summary, with a variable rate loan you have the option of paying your loan back faster if you can pay larger than the minimum monthly repayments, but there is a risk of having to pay larger minimum repayments if the RBA lifts the official cash interest rate.
One type of variable rate loan option to consider is a tracker interest rate home loan. The interest payable on these home loans mirrors any changes in the Reserve Bank official rates. When the reserve rate goes down, you don’t have to wait for your lender to pass on the savings. However, the downside is that you are instantly exposed to any interest rate rises.
A fixed rate home loan works a bit differently and can relieve mortgage stress with a locked-in, fixed rate on your home loan a set period. A fixed rate home loan often suits first home buyers, those who need to have the same repayments each month and those unwilling to ride the variable interest rate boom and bust cycles.
Demand for fixed rate home loans dropped slightly in the June quarter of this year after peaking at almost 15 per cent of the $1.1 trillion home loan market in March. Those considering a fixed rate should research whether they will face higher costs should they break their contract. However, the biggest concern for fixed rate home loan customers is often whether they will miss out on the benefits of lower repayments when and if interest rates fall.
A capped rate home loan allows home buyers to hedge their bets on whether interest rates will rise and whether a fixed or variable home loan is the right choice. The interest rate will follow the way your lender responds to the official cash rate, but won’t rise above a specified amount. This allows home buyer some protection from multiple interest rate rises while still offering savings during rate cuts.
Interest only repayments or principal and interest repayments?
The next thing a borrower has to grapple with is how they want to make repayments on the home loan.
If you decide you only want to pay the very minimum amount, that is to pay only the interest portion of the loan, then that is called an interest only repayment. The actual loan amount (the principle) will never be repaid during the interest only term.
Developers and property investors are likely to opt for interest only repayments if they don’t on keeping the property or the loan in the long term. Interest only repayments are a good option if you expect the value of the property to go up in the short term that you plan to own the asset. So the idea is that you take out the loan, pay the minimum amount in repayments for a 3-5 years, then when you sell the property (hopefully at a higher amount that what you bought it for) you can repay the loan in full and keep the capital gains.
As a first home owner you might decide on interest only repayments for the first few years of your loan then move to principal plus interest repayments once you are earning a higher wage.
Principal plus interest repayments are more common for borrowers who are living in their own home and for those who plan on paying off their home loan in the long term. The monthly repayments are higher than interest only repayments, but you are slowly paying back the principal component of the loan over time, which in turn reduces the interest on the loan too.
Monthly, fortnightly or weekly repayments?
Some lenders will let you make repayments on your home loan more frequently than the standard monthly repayment cycle. It will depend on your preference on what you want to do, but if you get paid weekly or fortnightly then you might want to make more regular repayments on your home loan.
You could make 12 monthly repayments a year or 26 fortnightly repayments in a year. When calculating interest savings it is better to opt for fortnightly repayments if your lender provides this option, but for people who get their wages paid to them monthly it might be easier for them to budget their monthly expenses when they have monthly home loan repayments.
Can I switch my current home loan?
Refinancing options for current home loans can be as simple as changing from a loan for first home buyers into a product that suits someone who has been in the mortgage market for some time. It may not even be a case of switching lenders.
Your home loan provider may be able to update your services to a home loan that better suits your needs. Changing your home loan features within your current mortgage provider could prove to be more affordable than refinancing to a new lender. However, if you can’t find a tailored mortgage solution for your
needs, it might pay off to shop around and think about changing your home loan provider .
Exit fees may apply to your home loan should you decide to close your existing mortgage service, especially if you didn’t initially look for a loan with the lowest exit fees. New laws passed in 2011 abolished exit fees; however this only applies to new home loans signed after 1 July 2011. If you are in a fixed rate home loan contract there could be other associated fees for breaking the fixed term of your contract before the term is up.
If your home loan has a honeymoon rate or a low interest introductory period. you could also be up for paying out the interest due for the period you locked into. Check that you aren’t still locked into a period of fixed or bonus interest.
You can sometimes avoid exit fees and paying out fixed interest home loans by considering alternative loan products from your current lender. Home loan comparison services can help you to see what’s available in the wider market but publicly advertised products and introductory rates might only be available to new customers looking to refinance from a different lender.
How is interest calculated on home loans?
The interest applied to your home loan in Australia is usually calculated daily and due monthly over the life of the home loan, regardless of if weather the interest rate applied is fixed or variable.
However, developers might consider home loans that allow interest to be paid in a lump sum after a period of 12 months. Alternatively, those buying an investment property might consider the tax breaks available for paying interest in advance.
If you have a variable rate loan and choose principal plus interest monthly repayments, then at the start of your loan your interest component of the monthly repayments make up a high proportion of the repayments. However over time once you have paid back a large portion of the principal, the interest component of your repayments are a smaller portion of each repayment.
After 20 years, a home loan of $500,000+ at 6.5% p.a. has cost the borrower more than $390,000 in interest.
What other home loan features could I benefit from?
The best home loans can be packed with features and benefits to save you money. Consider the option of a 100 per cent offset account. This means any savings you have can reduce the total loan amount on which your interest is calculated. This can be valuable for people who have lump sums paid from their wage each month. You could also combine interest free days on credit card purchases as a way of leaving your funds in an offset account for extended periods each month.
As well as saving money on interest, another way to reduce the total cost over the life of a loan is the ability to make additional payments. You may want to make extra payments after an inheritance or a bonus from work. Even something as simple as your standard pay rise could leave you in a position to make additional payments.
You might not want to live in the first house you buy for 20-30 years. Just because your home loan is long term doesn’t mean you have to stay in the same house or suffer exit fees and new application fees every time you want to move house. Do your research to see if your home loan is portable, which means if you can transfer your home loan from one property to the next without incurring any refinancing fees.
Top 10 tips for getting the most out of your home loan lender
1. Know what you want
Figure out exactly what you need from a home loan so you don’t have any unexpected surprises later. It also helps you see through features designed to attract you to home loans that you might not need.
2. Research the best home loans and mortgages
Compile the home loans you have identified as good value and then research them some more. Nothing is going to make your investment choice more transparent than comparing multiple home loans and mortgages side by side .
3. Know your discounts
If you can move your credit card or insurance to your bank and save on your home loan interest rate. do it straight away. Any jumping through hoops you do to bundle your services will quickly be worth it with interest saved.
4. Compare home loans using fortnightly repayments
Select the “fortnightly repayment” option on your home loan comparisons as that is how you will be paying off your loan. Why? Because there are 12 months in a year but 26 fortnights. If you pay $500 fortnightly you are paying $1000 more off your loan each year than someone paying $1000 monthly.
5. Have an exit strategy
You do not need a complete exit strategy for your home loan – all you need is the option to refinance without too many fees. It’s not something you think of when applying for a mortgage, but most loans are refinanced sometime after just three years.
6. If you have a mortgage, understand your commitments
Do the sums on how long it would take you to pay off any exit fees with money saved on a lower interest home loan. If you clearly map out the money you owe, you can begin to make informed home loan comparisons.
7. Be ready and organised for approval
If you want to ensure easy refinancing of your current home loan or being approved for a new one, have all your documentation ready. Better still, organise a pre-approval so you can start looking for the right home for your approved budget.
8. Ask yourself, how much is my property worth?
If you are refinancing your home loan. make sure you have appraisals done to ensure your home is worth the amount you expect. Only then can you begin to look for the best deal regarding your existing property, current equity and more.
9. Treat any refinancing like your first home loan
As a first home buyer looking for the best home loan, you would take your time to do your research and get it right. Refinancing your home loan to a better deal should be no different. You also don’t have to rush to beat looming auction days or the threat of other buyers.
10. Consider the online products
Just because you have had the same bank since your school days doesn’t mean you’re obliged to take out their home loans. Online comparisons for home loans and mortgages are valuable tools for saving you money and any fees that go along with bricks-and-mortar offerings.
Refinancing your home loan can be one of the major investment decisions with which you have ever been faced. However, understanding which loan options will suit you can be achieved by asking some simple questions about your current financial situation.
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