Advice on Picking the Right Home Loan

Low interest rates are the number one factor home buyers look at when choosing a mortgage. But there’s much more to choosing a good home loan than just the rate. With interest rates low across the board right now, buyers would do well to take a look at the other major factors important to choosing the right home loan.

Fixed vs. Variable

Possibly the biggest decision in choosing a mortgage is whether to pick a fixed or variable loan. Standard variable home loans are by far the most popular mortgage type for most Australians. However, with the consecutive rate cuts by the Reserve of Bank of Australia, our federal cash rate sits now at 2.5%, the lowest in decades.

In this low rate environment fixed rate loans become more attractive.

A fixed home loan allows you to lock in the current low interest rate for a certain term. After the loan’s fixed term, you would have the option of either fixing another term with the rate at that time or converting to a standard variable rate loan.

Fixed rate loans are very attractive right now but it’s important to note they allow less flexibility than variable rate loans. Fixed loans typically restrict repayments more so than variable loans, so you would have less flexibility to pay your loan off early. Refinancing a fixed loan can also be quite difficult and often involves heavy penalties for exiting before the fixed term ends.

Featured or Basic

If you go with a variable rate loan, the choice becomes whether you want a basic variable loan without any bells and whistles, or a standard variable loan with more flexibility and features.

One useful feature is an offset account which is a special savings account linked to your mortgage. If the balance on the account increases, it decreases the balance of your mortgage on which you pay interest. The more you keep in the account, the less you pay monthly.

Money you put in the offset account isn’t locked up and can still be withdrawn if needed. Offset accounts are a great option for many Australians but buyers should make sure they can maintain a significant amount in the account as there may be minimum balance requirements or fees, or the interest savings may simply not be worth the premium paid for this feature.
An offset account is a great option but only one of the various features available on modern home loans. Redraw facilities, line of credit, and other options are common features on standard variable rate loans. More features usually mean a higher monthly payment than a comparable basic variable rate loan so buyers should weigh the benefit of the features against the costs.

Loan Term

The term of your loan, or how long you will pay the loan off for, is a tricky issue for home buyers. A shorter term means you pay off your mortgage quicker and end up fully owning your property sooner. Financially it’s overall a prudent decision as you’re building equity quicker while a longer term means lower monthly payments. Buyers on a tighter budget may choose a longer term, such as a 30 year loan to ensure they can afford monthly loan payments.

For those who do choose a longer term loan, choosing a loan with the flexibility of early repayments can be wise, allowing them the affordability of a longer term loan while giving them the option to own their home earlier if they can make extra payments.

Interest rates aren’t the only factor when choosing a home loan.

With all the types of loans out there today and the features available, first home buyers should do some research and understand what’s best for them. Talk to First Home Owners Centre’s friendly and knowledgeable finance team today and we’ll help you understand the loan that’s right for you.