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What makes a good home loan?
If you’re just starting your home loan hunt, or you’re a seasoned mortgage holder looking for a better deal, you’re probably wondering what elements you should be looking out for to secure the best home loan possible.
What constitutes a ‘good home loan’ will differ from person to person, as everyone has unique circumstances that will inevitably impact how much they can borrow and how they make their repayments. These circumstances include lifestyle, budget, employment, financial situation, and relationship and family structures.
Ultimately, a good home loan is a mortgage that meets your personal and financial circumstances. It should be fitted with all the features you need to manage your mortgage the way you want to, and set up in a way that allows you to comfortably make your repayments. A good home loan should work for you, not the other way around.
Factors to consider to find a good home loan
From interest rates and repayments to features and fees, here’s a list of factors you should consider to find a mortgage that suits you:
When it comes to mortgages, interest is inevitable.
The interest rate that’s tied to your loan will affect how much you pay over your loan term, so it’s important to choose a rate you can afford. It’s also just as important to pick an interest structure that makes sense for your circumstances, whether it's fixed, variable, split or capped.
Here’s what each interest option means so you can set them apart:
- A fixed-rate home loan has a locked-in interest rate that remains the same for an agreed period of time, usually one to five years. When the fixed-rate period is over, you can choose to renew it with your lender or refinance it with another lender, to keep your repayments steady.
- A variable-rate home loan entails an interest rate that rises and falls with the market, so your repayments will go up and down depending on the economic climate.
- A split home loan may offer the best of both fixed and variable worlds. On a split loan, interest will be charged at a fixed rate on part of your loan, and at a variable rate on the remaining part. When the fixed-rate period ends, that portion of your loan will revert to a variable rate, which may not be the same variable rate as the other portion of your loan.
In the past, you may have also been able to consider capped-rate home loans, which are similar to variable rate home loans with a maximum limit on how high the rate can rise. However, there are no capped rate mortgages on the RateCity database, and you may find it difficult to find a capped rate mortgage product in the current market.
Mortgages are synonymous with repayments, but the type you choose and how frequently you pay them is up to you.
Repayment type
The standard repayment type, which almost all lenders offer, is principal-and-interest repayments. This works by borrowing money (the principal amount) and repaying it incrementally with interest included.
The alternative is interest-only repayments. This option allows you to delay repaying the loan principal for the first few years of the loan before you start chipping away at the principal amount (plus interest). Repayments are much cheaper to start off with but they’ll sharply rise when you start repaying the principal amount. When you’re only paying interest you’re not getting yourself closer to paying off your property, which could cost you more in total interest charges in the long run.
Repayment frequency
The same way you can pick the repayments you make, you can also pick how often you make those repayments. The three options most lenders offer are weekly, fortnightly and monthly. To decide which timespan would work best for you, have a think about your wage, expenses and general budget - and which would make the most sense time wise.
Also keep in mind, while choosing more frequent repayments may save you some money, it may be better to opt for a schedule that suits you, rather than risking missing a repayment, which may have harsh consequences.
Some home loans come with features to help you make the most of your mortgage, while others don’t. It’s important to consider the various features that are on offer and work out if they’re something you want access to.
Getting home loan pre-approval
Home Loan pre-approval occurs when a lender gives you conditional approval to borrow funds for your ideal property before you've even found it. This isn’t to be confused with an official offer.
Additional repayments
If you find yourself with an excess of savings down the track and want to make some extra contributions to your mortgage, you’ll need a home loan that allows you to do so.
Offset account
Attached to your home loan, an offset account is a transaction account designed to reduce how much interest you pay over the life of your loan. It works by ‘offsetting’ the account’s balance against your home loan balance daily, so you’re only charged interest on the difference between the total loan and offset amount.
Redraw facility
Also attached to your home loan, a redraw facility allows you to access (or redraw) some of the surplus repayments that you've made on your mortgage, which you can use for things like holidays, renovations and paying off other debts.
Mortgage holiday
Also called repayment holiday or mortgage freeze, a mortgage holiday gives you a break from your repayments for a limited period of time; usually between three and six months, but sometimes up to 12.
Lenders offering this feature may consider letting you take a mortgage holiday if you’re changing jobs, temporarily out of work, recovering from an injury or illness, or going on parental or maternity leave.
Keep in mind that you may still be charged interest on your home loan during a mortgage holiday. As these charges may be capitalised into your mortgage, you may end up paying more total interest on the property over time.
Home loan portability
Home loan portability is a handy feature that allows you to take the same loan with you if you sell your existing property and buy another home - saving you the time, cost and hassle of setting up a new mortgage.
A lot of lenders charge fees to access home loan features. Some fees you may have to fork out, depending on the mortgage you take out, may include:
- Application or establishment fees
- Property valuation fees
- Ongoing fees, such as annual fees
- Late payment or default fee, if you make an obligatory repayment late
- Early exit fee, if you repay your home loan in full and close it before the loan term ends
- Discharge fee, termination or settlement fees, for when you pay out your mortgage in full
- Break fees, if you switch loans during a fixed-rate period
- Account-keeping for offset accounts, if you have one attached to your loan
- Redraw fees, if you use a redraw facility
- Mortgage holiday fees, if you take one for an agreed period of time
- Moving your home loan, if you do so through a home loan portability feature
- Lender’s mortgage insurance (LMI), if you only have a small deposit on your loan.
Fees can quickly add up. If you don’t want to spend a fortune on them, your best bet may be shopping around at different lenders to see where you might score a deal.
How to pick a good home loan for you
It’s important to compare home loans across different lenders, so you can narrow down your options and pinpoint your ideal mortgage. You can use RateCity’s comparison tool to spot the differences between lenders and loans, so you can land on one that feels right.
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Product database updated 19 Apr, 2024
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