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Finding a home loan with a good interest rate
Finding a low interest rate can be as simple as looking at a list of home loans and sorting them by their rates, and building a home loan comparison. However, the home loan with the lowest interest rate may not be the best mortgage for you.
To get a home loan that suits your needs, it’s important to compare a variety of options. Consider their interest rates, but also their fees and other features and benefits to find the best home loan for you. Start by making your very own home loan comparison right now.
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Who provides the best home loan deals?
You could get a home loan simply by contacting your local bank, but there are many more options available, including:
- other large and small banks
- mutual banks
- building societies
- credit unions
- other non-bank lenders
The best mortgage lender for you will be the one offering a home loan with rates, fees, features and benefits that suit your needs.
Some banks offer home loan package deals, letting you bundle a mortgage with a bank account, credit card, and other financial services. This may offer more value than managing these accounts separately.
Some customer-owned banks even specialise in looking after people living in a particular area (such as a rural region), or working in a specialised profession (such as teaching or nursing). These customers may be able to enjoy special benefits, though other Australians can often also apply for home loans from these banks.
Online-only mortgage lenders can be convenient if you’d prefer to manage your home loan online or over the phone. Because these lenders don’t have branches, they can often offer more affordable mortgage deals.
Many different lenders offer special home loan deals, such as discounted interest rates, waived fees, or cashback offers. These introductory offers can be useful, as long as you keep any terms and conditions in mind.
What are the different types of home loans?
There is no ‘one size fits all’ home loan. Different types of home loans offer different features and benefits, and may be better suited to different borrowers.
Owner Occupier home loans and Investor home loans
If you’re buying a property to live in, you’re an owner-occupier. If you’re buying a property to earn money from rent and/or capital growth, you’re an investor. Investors and owner-occupiers use different types of home loans to reach their personal and financial goals.
Owner occupier home loans often have lower interest rates and fees than investor home loans. This is because most banks feel that owner occupier loans are less risky than investor loans. After all, an owner occupier is motivated to pay their mortgage and keep a roof over their head!
Investor home loans may have higher interest rates and fees than owner occupier home loans. However they may also offer flexible special features and other benefits that may be useful to investors, such as longer interest-only periods.
Principal & Interest and Interest Only home loans
A home loan’s “principal” is the money you’ve borrowed and need to pay back. In most home loans, each of your repayments will be made up of part of the principal, plus an interest charge based on the remaining amount still owing. Each repayment will bring you one step closer to paying off your mortgage and owning your home outright.
Some lenders will let you just pay the interest on your mortgage for a limited time, such as from one and five years, or longer for investors. This helps make your mortgage more affordable from month to month, relieving some pressure on your budget.
However, because interest-only payments won’t reduce your principal, your loan will likely take longer to pay off, meaning you’ll end up paying more interest in total. It’s also important to watch out for bill shock when your mortgage reverts back to principal and interest repayments at the end of the interest-only period.
Variable Rate and Fixed Rate home loans
Even if you choose a home loan with a low interest rate, the rate you’ll pay at the start of your loan may not be the same rate you’ll be paying at the end of your loan.
Most home loans charge interest at a variable rate. Your lender may increase or decrease its variable interest rates, depending on the economy. If your lender lowers rates, your minimum mortgage repayments will cost less from month to month. But if your lender raises rates, you’ll need to pay more.
You may be able to fix your home loan interest rate for a limited time, such as from one to five years. During this period, your interest charges will stay the same, even if your lender changes its variable rates. This keeps your payments consistent for simpler budgeting, and you won’t be charged extra if your lender raises variable rates. However, you’ll also miss out on interest savings if your lender cuts variable rates. It’s also important to watch out for bill shock when your loan reverts to a variable rate.
What options and features are available on home loans?
A home loan with the right features and benefits can make a big difference to your lifestyle, and may help you achieve your goals.
While there are a wide range of features available from mortgage providers, three of the most popular are extra repayments, redraw facilities, and offset accounts.
If you pay more than the required minimum onto your mortgage each month, the extra money will go directly onto your loan’s principal, reducing the amount you owe. Because your interest charges are calculated based on your current principal, extra repayments can help you to pay less interest, clear your debt faster, and own your home outright sooner.
Certain home loans don’t allow extra repayments, or limit how much extra money you can put on your mortgage. For example, if you have a fixed rate home loan, you may need to stick to a predetermined payment plan. Check with your lender before you apply.
Some home loans will let you “redraw” any extra repayments you’ve made on your home loan. This can help you confidently put part of your savings towards paying off your home loan and lowering your interest charges, as you can still put this money back in your pocket if you need it.
Keep in mind that some banks charge redraw fees, limit how much you can redraw from your home loan’s extra repayments, or limit the number of redraws you can make per year. Check the terms and conditions before you apply.
An offset account is a savings or transaction bank account that’s linked to your home loan. Any money in this account is used to “offset” your mortgage when interest is calculated on your loan.
For example, if you owed $300,000 on your mortgage, and had an offset account holding $10,000, the bank would calculate interest on your home loan as if you only owed $290,000. This can help you save money on interest charges.
Remember that the more features a home loan includes, the more likely it is to charge higher interest rates and fees. Compare the potential value of a home loan’s features to the extra costs you may need to pay.
How much can I borrow for a mortgage?
Before applying for a home loan, it’s important to get an idea of how much you can afford to borrow and comfortably pay back. If you apply to borrow too much money, you risk ending up in mortgage stress, meaning the lender may decline your mortgage application.
What is mortgage stress?
Mortgage stress is when you’re at risk of being unable to afford your mortgage payments if you’re hit with surprise expenses, such as car repairs or medical bills.
Different lenders define mortgage stress differently. One popular benchmark is when more than one-third of your household income is going towards your mortgage.
You can use a mortgage calculator to find out how much you can borrow, simply by entering some details of your income and expenses. Alternatively, you could enter your preferred loan size, term length and interest rate to calculate the repayments, then work out if you can afford the loan on your current budget.
How much do I need for a home loan deposit?
The more you can afford to pay as an upfront deposit on a property, the better the home loan deal you may be offered. Many home loans with low rates and special features will ask for a deposit of 20 per cent or more of the property’s value.
You may be able to get a home loan with a smaller deposit of 10 per cent or even 5 per cent of the property’s value. While you can save up a smaller deposit much faster, a deposit of less than 20 per cent usually means you’ll need to pay for Lenders Mortgage Insurance (LMI), which can be expensive.
What is LMI?
Lenders Mortgage Insurance (LMI) is an insurance policy that covers the risk of a borrower defaulting on their home loan repayments. LMI only protects the lender providing your mortgage, and does NOT protect you, the borrower (that’s what mortgage insurance and/or income insurance is for).
LMI is typically required if you’re borrowing more than 80 per cent of a property’s value in your mortgage, and paying a deposit of less than 20 per cent This is sometimes called having a Loan to Value Ratio (LVR) of 80 per cent or less.
LMI can add thousands to tens of thousands of dollars to your mortgage’s upfront costs. The higher your mortgage’s LVR, the more you may need to pay in LMI. Before you apply for a low deposit home loan, consider using an LMI calculator to estimate the costs.
Who do I need to speak to when applying for a home loan?
If you’ve done your research with mortgage comparisons, and know the home loan you want from a bank or mortgage lender, you could visit a branch, give them a call, or even chat online. Some mortgage providers also offer mobile lending services, where someone will come and meet with you to discuss your application.
If you’d like more help choosing a home loan, you may want to contact a mortgage broker. These experts can look at your personal finances and recommend specific home loans for you. They can also negotiate with lenders on your behalf to help you get a better deal, and may have access to special home loan offers that aren’t normally advertised.
Visiting a mortgage broker is usually free. Rather than charging fees to borrowers, most mortgage brokers are paid commissions by banks when they successfully sign up new home loan customers. But even though brokers are paid by banks, they work for borrowers. If you’re worried that a broker‘s commissions may be influencing their recommendations, ask them how they’d be paid for different home loans.
Step by step – How to get a home loan
- Collect financial documents (e.g. payslips, bank statements, bills etc.) to confirm your income and expenses.
- Fill out a lender’s mortgage application form.
- Get pre-approval, where a lender agrees in principle to provide a loan, but you or the lender can still walk away.
- Make an offer on a property.
- Credit check and valuation. The lender will check your credit score (based on your history of managing money), and calculate the value of the property to make sure you haven’t over-borrowed.
- If your application is approved, sign the formal home loan offer and contract.
- Prepare for settlement, which is the legal transfer of the property from one owner to another. A solicitor or conveyancer can help confirm that everything is done correctly.
- That’s it! Time to move in, or start looking for tenants.
What is a cooling off period?
A cooling off period is a length of time that follows signing a contract to purchase property, during which a buyer can choose to terminate the agreement without being in breach of contract and losing their deposit. This gives you a window of opportunity to change your mind about a property purchase if your circumstances change, or you decide it’s not right for you.
For example, if you signed a contract with a five-day cooling off period to buy a house, then changed your mind about the purchase, you could exercise the cooling off period to withdraw from the agreement within five days. You’d get your deposit back (minus a small fee), so you could still go out and make an offer on another property if you wished.
The exact rules around how cooling off periods work varies from state to state, so it’s important to check the facts before you sign on any dotted lines.
How do I refinance a home loan?
Refinancing a home loan means swapping your current mortgage for another. Borrowers refinance for many reasons, including:
- To get a better deal: swap to a mortgage with a lower interest rate, cheaper fees, or more useful features and benefits, and you’ll land the best home loan for your needs.
- To borrow more money: upsize to a bigger house, or renovate your current property.
- To consolidate other debts: add the money you owe money on credit cards, car loans or personal loans onto your mortgage to enjoy a lower interest rate (though you may end up paying more total interest over the long term).
Refinancing a home loan still requires a deposit, but rather than just using your savings, you can use the equity in your current property.
Your equity is the current value of your home, minus the amount you still owe on your mortgage. If you’ve been paying your mortgage for a few years, and your property has increased in value during this time, you may have more equity available than you realise. This may make it easier to refinance to a home loan that better suits your needs.
|AAPR, Comparison Rate or Real Rate||Three ways of saying the same thing. The Average Annual Percentage Rate (AAPR), Comparison Rate and the Real Rate refer to interest rates plus fees and charges rolled into a single percentage rate for ease of comparison|
|Amortising Loan||The most commonly used loan structure for a mortgage, which requires set repayments of principal and interest over a period of time.|
|Break cost||Fees charged by your lender if you exit your loan early, most often applied if you have a fixed interest rate|
|Bridging Finance||Helps you to “bridge” the gap between the sale of one property and the purchase of another.|
|Capped or Tunnel Loans||Capped loans limit how high your loan’s variable interest rate can go, while Tunnel loans limit both how high and low a rate can go.|
|Conveyancing||Conveyancing is the process of transferring legal ownership of a property from one party to another. Legal fees on a property purchase are called conveyancing fees.|
|Deposit||The amount of cash you need to contribute towards your home loan application.|
|Fixed Rate Loan||A mortgage with interest rates that are locked in for a certain period of time.|
|Interest Capitalisation||An option to add interest charges to your total loan balance for a limited time, rather than paying it as you go.|
|Introductory or Honeymoon Rate Loan||A mortgage offering a discounted interest rate for an initial introductory period (the “honeymoon”), before reverting to the higher standard rate.|
|Lenders Mortgage Insurance||LMI safeguards the lender in case a borrower defaults on their mortgage. LMI is typically required for mortgages with an LVR higher than 80% (or a deposit of less than 20%), with the borrower required to pay the cost.|
|Loan to Value Ratio (LVR)||The size of your home loan compared to the value of your property. For example, if you paid a 20% deposit on a property, and took out a mortgage for the remainder of its value, you’d have an LVR of 80%.|
|Mortgage Offset||A saving or transaction account linked to your home loan, which included when calculating interest charges. For example, if you had a $300,000 home loan and a 100% offset account holding $20,000, you’d be charged interest as if you only owed $280,000 on your mortgage.|
|Ongoing Fees||Ongoing fees are charged periodically over the life of the loan.|
|Overdraft||A line of credit, typically secured by the equity in your property, allowing you to borrow extra funds if required.|
|Parental Leave||A type of repayment holiday offered by some lenders when you become a parent|
|Portability||An option to pick up your loan and take it with you when you move houses.|
|Progressive Drawdown||When building a home rather than buying, funds can be accessed in small sums at various intervals to suit the building process, rather than as a single lump sum at the beginning.|
|Redraw||Pay extra money into your loan and withdraw it back if you need it in the future.|
|Refinancing||Taking out a new loan to pay out an old one. Refinancing may allow a borrower to enjoy more favourable interest rates, fees, features or benefits.|
|Repayment Holiday||An option to take a temporary “holiday” from loan repayments when you experience proven hardship, such as an unexpected loss of income.|
|Revolving Line of Credit||Essentially a giant overdraft, where money can be borrowed, repaid, then withdrawn again.|
|Salary Loan||A mortgage where your payments can come directly out of pre-tax income from your employer as a salary sacrifice, which can have tax benefits.|
|Split Loans||A home loan where interest is charged on part of your balance at a fixed rate, and part of your balance at a variable rate, providing you with a mix of security and flexibility.|
|Stamp Duty||Stamp Duty is a State Government tax on the sale and transfer of land and property|
|Switching Fees||The costs and charges involved when refinancing your home loan from one lender to another|
|Upfront Fees||Fees charged at the start of your home loan to help cover the cost of processing your application|
|Variable Rate Loan||A home loan where the lender may raise or lower your interest rate depending on a range of economic factors, including the national cash rate set by the Reserve Bank of Australia.|
Sally is the Research Director for RateCity and a regular commentator on television and radio about personal finance matters. She is passionate about helping everyday Australians get access to affordable finance options, and helping people save money through smart budgeting and easing everyday expenses. Sally is a contributor to news outlets including Fairfax, News Ltd and Money Magazine, among others.
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Home Loan Guide
Home loans have five key areas to consider: loan type, interest rate, fees, features and loan size.
Refinancing can help you save money, increase flexibility, consolidate debts and much more.
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Six steps to refinance your home loan?
Refinancing a home loan may help you to save money on your mortgage, enjoy greater flexibility or features, or even consolidate other debts. Learn more about switching home loans before you compare refinancing mortgage options at RateCity.
How much should I borrow? | RateCity
How much should you borrow from the bank when purchasing a property? Working out how much or how little you can afford to borrow is an important first step towards home ownership. It’s important not to borrow more than you can afford to repay, so consider your income and expenses when calculating your mortgage amount.
The home loan market is complex. With almost 4,000 different loans on offer, it’s becoming increasingly difficult to work out which loans work for you.
That’s where Real Time RatingsTM can help. Our system automatically filters out loans that don’t fit your requirements and ranks the remaining loans based on your individual loan requirements and preferences.
Best of all, the ratings are calculated in real time so you know you’re getting the most current information.
Bad credit home loans can be dangerous if the borrower signs up for a loan they’ll struggle to repay. This might occur if the borrower takes out a mortgage at the limit of their financial capacity, especially if they have some combination of a low income, an insecure job and poor savings habits.
Bad credit home loans can also be dangerous if the borrower buys a home in a stagnant or falling market – because if the home has to be sold, they might be left with ‘negative equity’ (where the home is worth less than the mortgage).
That said, bad credit home loans can work out well if the borrower is able to repay the mortgage – for example, if they borrow conservatively, have a decent income, a secure job and good savings habits. Another good sign is if the borrower buys a property in a market that is likely to rise over the long term.
If you want to get a home loan with bad credit, you need to convince a lender that your problems are behind you and that you will, indeed, be able to repay a mortgage.
One step you might want to take is to visit a mortgage broker who specialises in bad credit home loans (also known as ‘non-conforming home loans’ or ‘sub-prime home loans’). An experienced broker will know which lenders to approach, and how to plead your case with each of them.
Two points to bear in mind are:
- Many home loan lenders don’t provide bad credit mortgages
- Each lender has its own policies, and therefore favours different things
If you’d prefer to directly approach the lender yourself, you’re more likely to find success with smaller non-bank lenders that specialise in bad credit home loans (as opposed to bigger banks that prefer ‘vanilla’ mortgages). That’s because these smaller lenders are more likely to treat you as a unique individual rather than judge you according to a one-size-fits-all policy.
Lenders try to minimise their risk, so if you want to get a home loan with bad credit, you need to do everything you can to convince lenders that you’re safer than your credit history might suggest. If possible, provide paperwork that shows:
- You have a secure job
- You have a steady income
- You’ve been reducing your debts
- You’ve been increasing your savings
Most comparison sites give you information about rates, fees and features, but expect you’ll pay more with a low advertised rate and $400 ongoing fee or a slightly higher rate and no ongoing fee. The answer is different for each borrower and depends on a number of variables, in particular how big your loan is. Comparisons are either done based on just today or projected over a full 25 or 30 year loan. That’s not how people borrow these days. While you may take a 30 year loan, most borrowers will either upgrade their house or switch their home loan within the first five years.
You’re also expected to know exactly which features you want. This is fine for the experienced borrower, but most people know some flexibility is a good thing, but don’t know exactly which features offer more flexibility than others.
What is the flexibility score?
Today’s home loans often try to lure borrowers with a range of flexible features, including offset accounts, redraw facilities, repayment frequency options, repayment holidays, split loan options and portability. Real Time Ratings™ weights each of these features based on popularity and gives loans a ‘flexibility score’ based on how much they cater to borrowers’ needs over time. The aim is to give a higher score to loans which give borrowers more features and options.
They’re not always timely
In today’s competitive home loan market, lenders are releasing new offers almost daily. These offers are often some of the most attractive deals in the market, but won’t get rated by traditional ratings systems for up to a year.
The assumptions are out of date
The comparison rate is based on a loan size of $150,000 and a loan term of 25 years. However, the typical loan size is much higher than that. Million dollar loans are becoming increasingly common, especially if you live in metropolitan parts of Australia, like Sydney and Melbourne. It’s also uncommon for borrowers to hold a loan for 25 years. The typical shelf life for a home loan is a few years.
The other problem is because it’s a percentage, the difference between 3.9 or 3.7 per cent on a $500,000 doesn’t sound like much, but equals around $683 a year. Real Time Ratings™ not only looks at the difference in the monthly repayments, but it will work out the actual cost difference once fees are taken into consideration.
A fixed rate home loan is a loan where the interest rate is set for a certain amount of time, usually between one and 15 years. The advantage of a fixed rate is that you know exactly how much your repayments will be for the duration of the fixed term. There are some disadvantages to fixing that you need to be aware of. Some products won’t let you make extra repayments, or offer tools such as an offset account to help you reduce your interest, while others will charge a significant break fee if you decide to terminate the loan before the fixed period finishes.
A variable rate home loan is one where the interest rate can and will change over the course of your loan. The rate is determined by your lender, not the Reserve Bank of Australia, so while the cash rate might go down, your bank may decide not to follow suit, although they do broadly follow market conditions. One of the upsides of variable rates is that they are typically more flexible than their fixed rate counterparts which means that a lot of these products will let you make extra repayments and offer features such as offset accounts.
Split rates home loans
A split loan lets you fix a portion of your loan, and leave the remainder on a variable rate so you get a bet each way on fixed and variable rates. A split loan is a good option for someone who wants the peace of mind that regular repayments can provide but still wants to retain some of the additional features variable loans typically provide such as an offset account. Of course, with most things in life, split loans are still a trade-off. If the variable rate goes down, for example, the lower interest rates will only apply to the section that you didn’t fix.