FHOB rush: Guide to finding the best home loan

August 26, 2009

Don’t lose your head in the rush to find the right house and the best mortgage before the government’s Boost payments are reduced after September 30. Jackie Pearson investigates tips to finding your first home loan.

You still have time to apply for a home loan and receive the elevated levels of government payments under the First Home Owners Boost before the September 30 cut-off date but the worst thing you can do right now is panic.

Be careful not to buy the wrong home or take out the wrong mortgage just to get into the market. Buying a home is a costly exercise and you only need to sign the contract of sale and have your finances confirmed by September 30 to be eligible for the full boost, you don’t have to complete settlement.

Manage the pressure
While your focus is on finding the right property, there are some steps you should take to give yourself plenty of time to compare mortgages and get the best deal.

One trap to avoid is signing a contract “subject to finance” because if your home loan is not finalised before October 1, you will miss out on the extra government boost.

You should allow at least 20 business days  to have the loan confirmed and the property valuation completed to ensure you leave enough time to receive the boost.

According to the office of the Minister for Housing, Tanya Pilbersek, “…You are only eligible [for the First Home Owners Boost] when you become entitled to possession … entitlement to possession would not occur until finance had been approved.

“As such any contracts that were still subject to finance and not finalised before October 1 would not be eligible for the full amount of the relevant FHOG boost.”

David Airey, President of the Real Estate Institute of Australia, says he expects the amount of “first home buyer” properties going to auction will increase between now and the end of September. “You can’t buy subject to finance at an auction because auctions are cash sales,” he says.

Some auctioned properties have been recently selling for well above their reserve so you will need to be extremely disciplined to ensure you don’t pay an inflated price.

Be patient
Kevin Sherman, managing director of MyRate says the availability of suitable properties may become an issue as the deadline gets closer.

“We have seen more people who are formally approved for a loan subject to the property valuation but they can’t find a suitable property in their price range,” he says. “A year ago most people would have found a property that met our criteria within the 90 days.”

If you do miss the September 30 deadline, bide your time as you may find a better deal. Remember that the more savings you put towards the purchase the less loan costs you incur, such as lenders mortgage insurance.

Beware of home loan restrictions
Many lenders have climbed aboard the Boost bandwagon by offering special mortgage deals targeted at first home buyers but be careful that you don’t get starry-eyed over a cheap rate offered in the first 12 months, only to be stung for the next 24 years.

Sherman says make sure you don’t trade off important features for a discounted honeymoon rate. “The most important features are the ability to make unlimited additional repayments and then access those repayments, fee free.”

Scrutinise the deals
A few of the “discounted” home loans currently available, including Reduce Home Loan’s Discount 1 Year Fixed Fee-Free Loan, can represent good value over the long-term. It has an introductory rate of 3.49 percent p.a. and its comparison rate on a $275,000 mortgage is only 4.86 percent. The total cost of the loan is $467,885.

Other introductory rate loans have much higher comparison rates, so they become much more expensive once the honeymoon period is over and are actually less competitive than some standard variable home loans.

For example, you might find a loan with a one-year discount advertised rate of about 4 percent p.a. but the comparison rate for the life of the loan is as high as 5.49 percent p.a., so the total cost of the $275,000 loan over 25 years blows out to $506,421 and your monthly repayments would increase by $200 at the end of the honeymoon period.

Don’t let the impending Boost deadline blur your judgement when it comes to taking the time to thoroughly compare home loans. Offers providing low-rate “easy-entry” for first time borrowers may have a sting in their tail if the rate they revert to at the end of the honeymoon is too high.

Shop around because ending up with the wrong home loan could cost you many thousands of dollars more than the additional first home owners boost payments are worth.

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Learn more about home loans

How do I refinance my home loan?

Refinancing your home loan can involve a bit of paperwork but if you are moving on to a lower rate, it can save you thousands of dollars in the long-run. The first step is finding another loan on the market that you think will save you money over time or offer features that your current loan does not have. Once you have selected a couple of loans you are interested in, compare them with your current loan to see if you will save money in the long term on interest rates and fees. Remember to factor in any break fees and set up fees when assessing the cost of switching.

Once you have decided on a new loan it is simply a matter of contacting your existing and future lender to get the new loan set up. Beware that some lenders will revert your loan back to a 25 or 30 year term when you refinance which may mean initial lower repayments but may cost you more in the long run.

Who has the best home loan?

Determining who has the ‘best’ home loan really does depend on your own personal circumstances and requirements. It may be tempting to judge a loan merely on the interest rate but there can be added value in the extras on offer, such as offset and redraw facilities, that aren’t available with all low rate loans.

To determine which loan is the best for you, think about whether you would prefer the consistency of a fixed loan or the flexibility and potential benefits of a variable loan. Then determine which features will be necessary throughout the life of your loan. Thirdly, consider how much you are willing to pay in fees for the loan you want. Once you find the perfect combination of these three elements you are on your way to determining the best loan for you. 

What happens to my home loan when interest rates rise?

If you are on a variable rate home loan, every so often your rate will be subject to increases and decreases. Rate changes are determined by your lender, not the Reserve Bank of Australia, however often when the RBA changes the cash rate, a number of banks will follow suit, at least to some extent. You can use RateCity cash rate to check how the latest interest rate change affected your mortgage interest rate.

When your rate rises, you will be required to pay your bank more each month in mortgage repayments. Similarly, if your interest rate is cut, then your monthly repayments will decrease. Your lender will notify you of what your new repayments will be, although you can do the calculations yourself, and compare other home loan rates using our mortgage calculator.

There is no way of conclusively predicting when interest rates will go up or down on home loans so if you prefer a more stable approach consider opting for a fixed rate loan.

Who offers 40 year mortgages?

Home loans spanning 40 years are offered by select lenders, though the loan period is much longer than a standard 30-year home loan. You're more likely to find a maximum of 35 years, such as is the case with Teacher’s Mutual Bank

Currently, 40 year home loan lenders in Australia include AlphaBeta Money, BCU, G&C Mutual Bank, Pepper, and Sydney Mutual Bank.

Even though these lengthier loans 35 to 40 year loans do exist on the market, they are not overwhelmingly popular, as the extra interest you pay compared to a 30-year loan can be over $100,000 or more.

What is a variable home loan?

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.

What is a fixed home loan?

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.

What is a comparison rate?

The comparison rate is a more inclusive way of comparing home loans that factors in not only on the interest rate but also the majority of upfront and ongoing charges that add to the total cost of a home loan.

The rate is calculated using an industry-wide formula based on a $150,000 loan over a 25-year period and includes things like revert rates after an introductory or fixed rate period, application fees and monthly account keeping fees.

In Australia, all lenders are required by law to publish the comparison rate alongside their advertised rate so people can compare products easily.

What's wrong with traditional ratings systems?

They’re impersonal 

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. 

How do I take out a low-deposit home loan?

If you want to take out a low-deposit home loan, it might be a good idea to consult a mortgage broker who can give you professional financial advice and organise the mortgage for you.

Another way to take out a low-deposit home loan is to do your own research with a comparison website like RateCity. Once you’ve identified your preferred mortgage, you can apply through RateCity or go direct to the lender.

Remaining loan term

The length of time it will take to pay off your current home loan, based on the currently-entered mortgage balance, monthly repayment and interest rate.

What are the pros and cons of no-deposit home loans?

It’s no longer possible to get a no-deposit home loan in Australia. In some circumstances, you might be able to take out a mortgage with a 5 per cent deposit – but before you do so, it’s important to weigh up the pros and cons.

The big advantage of borrowing 95 per cent (also known as a 95 per cent home loan) is that you get to buy your property sooner. That may be particularly important if you plan to purchase in a rising market, where prices are increasing faster than you can accumulate savings.

But 95 per cent home loans also have disadvantages. First, the 95 per cent home loan market is relatively small, so you’ll have fewer options to choose from. Second, you’ll probably have to pay LMI (lender’s mortgage insurance). Third, you’ll probably be charged a higher interest rate. Fourth, the more you borrow, the more you’ll ultimately have to pay in interest. Fifth, if your property declines in value, your mortgage might end up being worth more than your home.

Does Real Time Ratings' work for people who already have a home loan?

Yes. If you already have a mortgage you can use Real Time RatingsTM to compare your loan against the rest of the market. And if your rate changes, you can come back and check whether your loan is still competitive. If it isn’t, you’ll get the ammunition you need to negotiate a rate cut with your lender, or the resources to help you switch to a better lender.

Can I change jobs while I am applying for a home loan?

Whether you’re a new borrower or you’re refinancing your home loan, many lenders require you to be in a permanent job with the same employer for at least 6 months before applying for a home loan. Different lenders have different requirements. 

If your work situation changes for any reason while you’re applying for a mortgage, this could reduce your chances of successfully completing the process. Contacting the lender as soon as you know your employment situation is changing may allow you to work something out. 

How do I know if I have to pay LMI?

Each lender has its own policies, but as a general rule you will have to pay lender’s mortgage insurance (LMI) if your loan-to-value ratio (LVR) exceeds 80 per cent. This applies whether you’re taking out a new home loan or you’re refinancing.

If you’re looking to buy a property, you can use this LMI calculator to work out how much you’re likely to be charged in LMI.