Would you spend more time researching a holiday than the right home loan? According to reports, despite home loans being one of the biggest financial decisions most people make in their life time, some are still spending more time planning a holiday than their financial future.
Failing to shop around and do your homework to find a suitable home loan could cost you thousands of dollars in extra interest over the life of the loan. You might not think that a small difference in interest rate would have much of an impact in how much is repaid, but it all adds up.
In a similar way that an investment grows if the interest is added to the capital, a home loan does much the same but in reverse. The reason is ‘compounding’.
To see how a small gap in rates can have a big impact on the overall cost of a home loan, try using our mortgage calculator tool.
If you assume a home loan of $350,000 repaid at a rate of 6 percent over 25 years, the amount of interest paid is $326,515. If the rate is 5.5 percent, the amount repaid in interest falls to $294,791. That’s a staggering difference of $31,724 between the two rates.
Look beyond the rate
When shopping for a home loan, though, the option with the lowest interest rate may not necessarily be the best loan. It’s important to consider fees and charges, which can add thousands of dollars to the overall cost of a mortgage, so you’ll need to factor these in. All lenders are required to provide the ‘comparison rate’ alongside their advertised rates. It includes most of the fees, but not all and expresses those costs through the interest rate.