FHOB rush: Guide to finding the best home loan

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. 

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.

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.

What is a valuation and valuation fee?

A valuation is an assessment of what your home is worth, calculated by a professional valuer. A valuation report is typically required whenever a property is bought, sold or refinanced. The valuation fee is paid to cover the cost of preparing a valuation report.

How is the flexibility score calculated?

Points are awarded for different features. More important features get more points. The points are then added up and indexed into a score from 0 to 5.

What does going guarantor' mean?

Going guarantor means a person offers up the equity in their home as security for your loan. This is a serious commitment which can have major repercussions if the person is not able to make their repayments and defaults on their loan. In this scenario, the bank will legally be able to the guarantor until the debt is settled.

Not everyone can be a guarantor. Lenders will generally only allow immediate family members to act as a guarantor but this can sometimes be stretched to include extended family depending on the circumstances.

What happens to your mortgage when you die?

There is no hard and fast answer to what will happen to your mortgage when you die as it is largely dependent on what you have set out in your mortgage agreement, your will (if you have one), other assets you may have and if you have insurance. If you have co-signed the mortgage with another person that person will become responsible for the remaining debt when you die.

If the mortgage is in your name only the house will be sold by the bank to cover the remaining debt and your nominated air will receive the remaining sum if there is a difference. If there is a turn in the market and the sale of your house won’t cover the remaining debt the case may go to court and the difference may have to be covered by the sale of other assets.  

If you have a life insurance policy your family may be able to use some of the lump sum payment from this to pay down the remaining mortgage debt. Alternatively, your lender may provide some form of mortgage protection that could assist your family in making repayments following your passing.

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 redraw fee?

Redraw fees are charged by your lender when you want to take money you have already paid into your mortgage back out. Typically, banks will only allow you to take money out of your loan if you have a redraw facility attached to your loan, and the money you are taking out is part of any additional repayments you’ve made. The average redraw fee is around $19 however there are plenty of lenders who include a number of fee-free redraws a year. Tip: Negative-gearers beware – any money redrawn is often treated as new borrowing for tax purposes, so there may be limits on how you can use it if you want to maximise your tax deduction.

Mortgage Balance

The amount you currently owe your mortgage lender. If you are not sure, enter your best estimate.

What is an ombudsman?

An complaints officer – previously referred to as an ombudsman -looks at formal complaints from customers about their credit providers, and helps to find a fair and independent solution to these problems.

These services are handled by the Australian Financial Complaints Authority, a non-profit government organisation that addresses and resolves financial disputes between customers and financial service providers.

Monthly Repayment

Your current monthly home loan repayment. To accurately calculate how much you could save, an accurate payment figure is required. If you are not certain, check your bank statement.

Why should you trust Real Time Ratings?

Real Time Ratings™ was conceived by a team of data experts who have been analysing trends and behaviour in the home loan market for more than a decade. It was designed purely to meet the evolving needs of home loan customers who wish to merge low cost with flexible features quickly. We believe it fills a glaring gap in the market by frequently re-rating loan products based on the changes lenders make daily.

Real Time Ratings™ is a new idea and will change over time to match the frequently-evolving demands of the market. Some things won’t change though – it will always rate all relevent products in our database and will not be influenced by advertising.

If you have any feedback about Real Time Ratings™, please get in touch.