Get the most from your mortgage by looking beyond the interest rate debate and putting loan features, fees and your financial objectives in the equation.
"With much attention placed on lenders' home loan interest rates, it is easy to lose sight of the bigger picture and to neglect to factor in other loan aspects that may offer longer-term benefits to borrowers than a loan with simply the lowest interest rate," says Mortgage Choice spokesperson Belinda Williamson.
"Borrowers should do their finances a favour by choosing a home loan on more than interest rate alone. A loan's features, such as an offset account or redraw facility, associated fees, and whether you choose a fixed, variable or split interest rate will have an effect on how much you will pay in overall interest and how long it could take to repay the loan.
"Whether you have had your loan for years and are considering refinancing or taking out an additional loan, or you are a first time buyer doing your initial research, forward planning may greatly improve the quality of your property ownership journey. Starting out with forethought about the features you are likely to want in the years to come can save a great deal of time and hassle."
7 top tips to help borrowers choose a well suited home loan:
1. Option of an offset account: An offset account with deposited savings attached to a home loan helps reduce the interest accumulated on the loan amount. Take a loan of $300,000 at 7% over 30 years, if $5,000 was held in a full offset account from day one, the loan term is reduced by approximately 17 months and the interest owed is reduced by around $33,464. Note some lenders offer partial offset only.
2. Factor in a loan redraw facility: Similar to the savings offered by a full offset account, a redraw facility allows borrowers to place their income, savings and/or extra repayments into the loan and enables them to withdraw funds when needed. In some cases this is at a cost. It is an alternative to storing money in a savings account, where the interest earned is taxable. However, this facility requires good discipline.
3. Consider the type of rate: Borrowers needing certainty over repayments might consider a fixed rate loan. However, this loan type may not offer a full range of features, such as the ability to contribute and redraw extra funds or use an offset account. The loan could also cost more if, during the fixed term, rates fall. For those seeking stability and flexibility, splitting the loan across fixed and variable may be a solution.
4. Focus on fees: Loan fees may include application and/or discharge fees plus monthly or annual account keeping fees. But depending on the type of loan and/or lender, there could be fees for making additional repayments, opting for a rate lock or breaking a loan term early. It is important to investigate the full range of costs associated with a particular loan.
5. Look at a comprehensive list of lenders: There are hundreds of loan products and many different types of lenders, such as big banks, small banks, credit unions and building societies. A professional mortgage broker will have access to a comprehensive mix of lenders and loans and will provide a complete rundown of the suitable loan products and latest deals.
6. Choose your loan term: The loan term impacts the repayment amount and interest paid over the life of the loan. For example, if you borrow $300,000 at 7% over 30 years, principal and interest repayments are $1,996 per month, total loan costs are $718,527 and the interest is $418,527. The same loan, repaid over 25 years, sees monthly repayments $124 higher but equates to a saving of $82,426 in interest. Convenient online loan calculators can assist with calculating the bigger picture.
7. Get a repayment holiday: If you have built up extra funds in your home loan, some lenders offer full or partial repayment 'holidays' for set periods. These can be helpful if you are starting a family, changing careers or taking time off, and need to put repayments on hold until your cash flow returns to normal.
For home loan tips, trends, facts, data and other information, visit www.MortgageChoice.com.au.