How to Choose the Right Home Loan

What are the different types of home loans available?

What’s the difference between fixed and variable rate loans?

What fees can be expected when applying for a mortgage?

What loan features should home buyers look for?

These are all questions that first home buyers must wrestle with. Getting all the questions can be especially difficult when you consider that there are literally hundreds of different loan products on the market. And the reason why is because everyone has different financial circumstances.

It pays to educate yourself on the different loan types, fees, and features available. This way you will be better prepared when it comes time to apply for a mortgage. Understanding these can actually end up saving you quite a bit of money.

Loan Types

Before applying for a mortgage, it helps to understand the different types. There are three main types available:

  • Basic loans: As the name suggests, this is a no frills loans. What makes it appealing to first home buyers is the low interest rate. But the downside is there are generally few features available. This may be suitable for you if you want the option to make extra repayments or have redraw facilities.
  • Standard loans: This type of loan gives you more flexible that is absent from basic loans. Examples include being able to redraw any extra money you paid the option to switch to a fixed or split rate later on. These additional features come at a higher interest rate however.
  • Home loan package: Packages offer great value to homeowners. These are typically standard loans with interest rate discounts, making them cheaper than basic loans. Packages are also available with free transaction accounts you can withdraw from. However, fees of up to $400 a year apply for home loan packages.

So which one should you pick?

The answer ultimately depends. Your best option is to do additional research into each one and evaluate your financial circumstances. If you want extra flexibility and more features, a standard loan would likely suit you better than a basic loan.

Fixed vs Variable Rate

The rate on your mortgage determines how much you will pay in interest so you definitely want it to be as low as possible. Here are the two main types:

  • Fixed rates: With these loans, the interest rate remains the same for a set time period typically between three to five years. Your monthly repayments are always the same whether market rates go up or down.
  • Variable rate: The interest rate is closely tied to the economy. This means your payments will also vary. So if the market rates go up, you can also expect the interest rate on the loan to increase. But your repayments will also go down if rates decrease.

Another option is to split your home loan: part fixed and part variable. Only a portion of your loan is affected should market rates go down.

Fees

As a first home buyer, you need to understand the costs involved so you know what to expect. Lenders should also tell you exactly how much certain fees are. Sometimes you may even be able to get a discount as lenders want your business.

Here are some of the common fees:

  • Application fees: Lenders charge an upfront fee to process your application. Don’t be afraid to ask for a discount or even to waive the fee entirely. Most lenders are willing to negotiate with you.
  • Valuation fees: Before a lender can approve a mortgage, a valuation on the property must be done. Have the lender check that you meet all the requirements before proceeding with this step.
  • Lenders mortgage insurance: LMI is required if you are unable to put down at least 20% of the property’s purchase price. This is to protect the lender in the event of a loan default. You can avoid paying LMI if you put down a larger deposit.
  • Stamp duty: Stamp duty varies from state to state but the higher the value of your property is, the more you will need to pay.
  • Building inspections: Even if you are building a new home, you need to have a building inspection done. This requires a train specialist to check and analyse all aspects of a property.

Break costs: Fixed rate loans come with limited features. Break costs are fees that lenders charge if you make extra repayments or pay off the loan before the term has expired.

The total costs for everything is substantial. Be sure to ask your lender about what fees to expect so you can better prepare your finances.

Loan Features

Loans typically come with flexible and convenient features, some of which can significantly save you more money.

Here are some features to look for:

  • Extra repayments: This option allows you to make extra payments on your loan which has considerable advantages. More money goes towards paying off the principal and you save on interest. However, not all loans have this option.
  • Redraw facility: This allows you to withdraw any extra repayments you made on the loan. Ideally you want to look for loan that offers free redraws so you can access your money without any penalties.
  • Offset accounts: Linking an offset account can significantly reduce payable interest. If you have $15,000 set aside in an offset account and your loan is $250,000 you pay interest on the balance or $235,000.

The loan features you choose ultimately depends on your lifestyle and finances. This is all a basic overview of what to expect when applying for a loan. There is no substitute for speaking with a consultant in person.

If you have any more questions, we are happy to help.

FHOC is a leading home builder in Perth with extensive industry experience. Our experts work with you at every step of the way to get you into your dream home. Contact us today to set up an initial consultation with our team.

First Home Owners Centre Contact Information

24/7 Sales Enquiry Line: (08) 6144 1088

Email: sales@fhoc.com.au