The top 5 questions to ask when choosing a home loan

The top 5 questions to ask when choosing a home loan

The process of getting a home loan can feel daunting, especially for first home buyers. This is why it’s so important that you come prepared when you start the home loan process. 

Whether you’re working with a mortgage broker, or doing it alone, there are some essential questions you need to ask when choosing a home loan.

1.    How much can I borrow?

One of the most important questions to ask when looking for financing for a property is how much you can borrow. After all, without a guide you could find yourself looking at properties well outside of your price range. If you’re not working with a broker, there are borrowing power calculators online that can help give you a good indication of this.

  •  A home loan lender will determine your borrowing power by looking at a few things:
  • Your income and any other applicants’ income;
  • Number of dependents;
  • Your living expenses; and
  • Your current debt - including credit cards, car loans and even your HECS/HELP debt.

It’s important to keep in mind that a lender calculates your borrowing power by looking at any regular spending you make, particularly in the few months leading up to your home loan application. So, if you’re ordering food delivery every week, or addicted to Afterpay, your lender may assume that this expense will continue for the life of a loan and deduct it from your borrowing power. 

2.    What fees and costs are involved?

There are a range of fees that a home loan lender may charge you that, as mentioned above, can significantly increase the costs of a home loan than first expected. But it’s not just lender fees to look for, with the real estate agent and Government charging their own costs. 

The potential fees and costs of a home loan include:

 Type of costs About 
Upfront costs  One-off application fees, valuation fees, conveyancing charges, legal costs, government costs, Lenders Mortgage Insurance (LMI) and stamp duty.
 Ongoing costs Annual fees, monthly service fees, extra repayment costs, redraw fees, late payment costs, switching fees, portability fee and discharge fees.

3.    What features does the loan offer?

It’s not just how much the loan will cost you that you want to consider, but how the loan can benefit you too. Home loans can also come with a range of features and perks that can help you to pay down your debt faster and meet savings goals, such as:

  • Extra repayments. Some lenders will charge you a fee if you make extra repayments, so keep an eye out for loans that allow this feature at no cost.
  • Redraw facility. Allows borrowers to ‘draw down’ on any extra repayments made on their home loan.
  • Offset account. A linked transaction or savings account connected to your home loan. Any amount you put into this account will ‘offset’ the balance of your home loan. Meaning, if you have a $400,000 home loan and a $50,000 offset account balance, your repayments and interest will be as if you have a $350,000 balance.
  • Split rates. Some loans allow you to split the interest rate type between variable and fixed, so you can have the stability of some fixed rate repayments and the flexibility of variable rate repayments. This can come in handy for borrowers who cannot decide between the two interest rate types.

4.    What repayment options do I have?

You have more control over your repayments than you think. There are a few repayment ypes and frequencies you may want to choose from, including:

  • Interest rate types – lenders offer two main types of loan rates: fixed or variable. The former means you fix, or lock in, an interest rate for a set period of time, typically around 2-3 years. The latter means your interest rate is subject to fluctuation in the market and by the lender. If the Reserve Bank of Australia were to cut the cash rate, or if the lender were to hike rates, your home loan rate would likely move too. As mentioned above, you can also opt to split your rate between the two types instead.
  • Repayment types – you may also have the option of choosing between paying principal and interest or interest only on your mortgage. Interest only repayments aren’t as common as they once were, as there is inherit risk in not chipping away at your home loan debt. If you find an interest-only loan, it will generally revert to the lender’s standard variable rate after a fixed period of time.
  • Repayment frequency – You may also choose between weekly, fortnightly or monthly repayments. Making more frequent payments can understandably help reduce your principal faster, and therefore potentially cut down on the amount of interest you’ll be charged over the life of the loan. If your budget were to get tighter down the track though, switching to monthly repayments would likely offer much needed breathing room. 

5.    How big of a deposit do I need?

While saving for a smaller deposit of 10 per cent can be a lot easier and more achievable for many Australians, especially those living in capital cities, often lenders reward borrowers with even bigger deposits.

If you’re hoping to get the most competitive interest rates in the market, when shopping for a home loan ask what the LVR (loan-to-value-ratio) requirements are for the lowest rates on offer. If your ideal home loan lender is offering its lowest rates to borrowers with LVRs of 80 per cent or even 70 per cent, this mean you’ll need a home loan deposit of 20 – 30 per cent to qualify for these rates. 

While this may not be within reach for many first home buyers, it is worth keeping in mind for when you’re looking to refinance in a few years. If you’ve managed to build up some equity and get your LVR below 80, you may now qualify for some of the most competitive rates around.  

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How do I apply for a home improvement loan?

When you want to renovate your home, you may need to take out a loan to cover the costs. You could apply for a home improvement loan, which is a personal loan that you use to cover the costs of your home renovations. There is no difference between applying for this type of home improvement loan and applying for a standard personal loan. It would be best to check and compare the features, fees and details of the loan before applying. 

Besides taking out a home improvement loan, you could also:

  1. Use the equity in your house: Equity is the difference between your property’s value and the amount you still owe on your home loan. You may be able to access this equity by refinancing your home loan and then using it to finance your home improvement.  Speak with your lender or a mortgage broker about accessing your equity.
  2. Utilise the redraw facility of your home loan: Check whether the existing home loan has a redraw facility. A redraw facility allows you to access additional funds you’ve repaid into your home loan. Some lenders offer this on variable rate home loans but not on fixed. If this option is available to you, contact your lender to discuss how to access it.
  3. Apply for a construction loan: A construction loan is typically used when constructing a new property but can also be used as a home renovation loan. You may find that a construction loan is a suitable option as it enables you to draw funds as your renovation project progresses. You can compare construction home loans online or speak to a mortgage broker about taking out such a loan.
  4. Look into government grants: Check whether there are any government grants offered when you need the funds and whether you qualify. Initiatives like the HomeBuilder Grant were offered by the Federal Government for a limited period until April 2021. They could help fund your renovations either in full or just partially.  

Does the Home Loan Rate Promise apply to discounted interest rate offers, such as honeymoon rates?

No. Temporary discounts to home loan interest rates will expire after a limited time, so they aren’t valid for comparing home loans as part of the Home Loan Rate Promise.

However, if your home loan has been discounted from the lender’s standard rate on a permanent basis, you can check if we can find an even lower rate that could apply to you.

Can I take a personal loan after a home loan?

Are you struggling to pay the deposit for your dream home? A personal loan can help you pay the deposit. The question that may arise in your mind is can I take a home loan after a personal loan, or can you take a personal loan at the same time as a home loan, as it is. The answer is that, yes, provided you can meet the general eligibility criteria for both a personal loan and a home loan, your application should be approved. Those eligibility criteria may include:

  • Higher-income to show repayment capability for both the loans
  • Clear credit history with no delays in bill payments or defaults on debts
  • Zero or minimal current outstanding debt
  • Some amount of savings
  • Proven rent history will be positively perceived by the lenders

A personal loan after or during a home loan may impact serviceability, however, as the numbers can seriously add up. Every loan you avail of increases your monthly installments and the amount you use to repay the personal loan will be considered to lower the money available for the repayment of your home loan.

As to whether you can get a personal loan after your home loan, the answer is a very likely "yes", though it does come with a caveat: as long as you can show sufficient income to repay both the loans on time, you should be able to get that personal loan approved. A personal loan can also help to improve your credit score showing financial discipline and responsibility, which may benefit you with more favorable terms for your home loan.

How do you determine which home loan rates/products I’m shown?

When you check your home loan rate, you’ll supply some basic information about your current loan, including the amount owing on your mortgage and your current interest rate.

We’ll compare this information to the home loan options in the RateCity database and show you which home loan products you may be eligible to apply for.

 

What is an ongoing fee?

Ongoing fees are any regular payments charged by your lender in addition to the interest they apply including annual fees, monthly account keeping fees and offset fees. The average annual fee is close to $200 however there are almost 2,000 home loan products that don’t charge an annual fee at all. There’s plenty of extra costs when you’re buying a home, such as conveyancing, stamp duty, moving costs, so the more fees you can avoid on your home loan, the better. While $200 might not seem like much in the grand scheme of things, it adds up to $6,000 over the life of a 30 year loan – money which would be much better off either reinvested into your home loan or in your back pocket for the next rainy day.

Example: Anna is tossing up between two different mortgage products. Both have the same variable interest rate, but one has a monthly account keeping fee of $20. By picking the loan with no fees, and investing an extra $20 a month into her loan, Josie will end up shaving 6 months off her 30 year loan and saving over $9,000* in interest repayments.

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 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 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.

How do I apply for Westpac’s first home buyer loan?

If you’re a first home buyer looking to apply for a home loan with Westpac, they offer an online home loan application. They suggest the application can be completed in about 20 minutes. Based on the information you provide, Westpac will advise you the amount you can borrow and the costs associated with any possible home loan. 

You can use Westpac’s online mortgage calculators to estimate your borrowing power. You can also work out the time it might take to save up for the deposit, and the size of your home loan repayments

When applying for a home loan with Westpac, you’re assigned a home finance manager who can address your concerns and provide information. The manager will also offer guidance on any government grants you may be eligible for. 

How does ANZ calculate early repayment costs?

If you have a fixed interest home loan, you’ll pay ANZ home loan early exit fees for partial or full repayment of the loan amount before the end of the fixed interest rate duration. These fees are also payable if you switch to another variable or fixed-rate loan.

The ANZ mortgage early exit fees can vary and you can get an estimate from the lender before you decide to prepay the loan. However, the exact early repayment cost can be determined when you prepay the loan.

The early exit fees are calculated after considering factors like the prepayment amount, the period left before the fixed-rate duration ends, and the change in the market rates since the beginning of the fixed-rate period. The early exit fees may not be charged if you’re paying off a smaller amount. You can check with ANZ to see how much you’ll have to pay.

What is the difference between fixed, variable and split rates?

Fixed rate

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.

Variable rate

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.

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.

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.

How much deposit do I need for a home loan from ANZ?

Like other mortgage lenders, ANZ often prefers a home loan deposit of 20 per cent or more of the property value when you’re applying for a home loan. It may be possible to get a home loan with a smaller deposit of 10 per cent or even 5 per cent, but there are a few reasons to consider saving a larger deposit if possible:

  • A larger deposit tells a lender that you’re a great saver, which could help increase the chances of your home loan application getting approved.
  • The more money you pay as a deposit, the less you’ll have to borrow in your home loan. This could mean paying off your loan sooner, and being charged less total interest.
  • If your deposit is less than 20 per cent of the property value, you might incur additional costs, such as Lenders Mortgage Insurance (LMI).