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Finding the best home loan for you and your family can be a nightmare without the right advice.
Today there are hundreds of home loan products available from many banks and other mortgage providers. In fact, there are so many choices that things can become very confusing.
On this page we have provided some basic information to help you on your way. But before you make a decision be sure to obtain the advice of a properly qualified Mortgage Broker.
Choosing a Home Loan
Selecting your loan
With so many loans currently on offer this decision will not be easy. Start by organising your needs, seeing which loan products best meet these needs and then evaluating their various benefits and costs.
The following notes may help.
Homes to live-in & property as an investment
Loans for homes come in two basic types. The first is loans for homes people want to live-in. This loan is called a ‘Residential Home Loan’. The second is called a ‘Residential Investment Loan’. It is for owners who will not be occupying the property. Tell your loan provider the purpose of your loan and they will tell you what they offer.
Stage 1: What do you need?
Determining your requirements may be as easy as finding the loan provider with the lowest rate. Others may wish to use someone they have come to know and trust. Others still may need access to special features such as a line of credit or might need great flexibility. Checking terms and conditions for each loan provider you consider can be very important.
Length of your loan
The number of years it will take to pay off your loan is referred to as the loans ‘Term’. Some loans let you pay off the loan earlier and some will not. Most people want to pay off their loan as quickly as possible, which of course saves money but restrictions can apply and should be carefully considered as part of the loans overall package. Late payment or penalty charges or conditions should also be viewed with care.
Two popular loans: fixed & variable
The difference between a fixed loan and a variable loan can be easily understood. A fixed loan has a fixed rate of interest agreed to between the lender and you. This rate will stay the same over the entire ‘term’ of the loan. A variable loan has a rate of interest which can move either up or down as determined by the rate set by the Reserve Bank of Australia. Some people see an advantage in having a part fixed and part variable loan. Lenders will advise you if they will split a loan this way. Such loans are called a ‘split’ loan.
What is a ‘fixed’ home loan?
A fixed rate home loan will not change over time. Because the rate of interest charged on these loans is set prior to the loan commencing this loan is popular during times of rising interest rates. It locks in the rate if rates rise. It also locks them in if rates drop. Its primary benefit is that it lets the borrower know exactly how much to budget and plan for each month.
What is a ‘variable’ home loan?
A variable rate home loan moves up and down according to market interest rates. Its main determinant is the cash rate set by the Reserve Bank. A variable rate loan can fall below that of a fixed rate loan. It can also, or course, rise above.
Other types of loans
Some lending institutions offer home loans of other types. They may include a ‘capped’ loan where the interest rate will not rise above the point where it has been ‘capped’, but can move down according to market rates. These types of loans are not in wide use at the moment.
Borrowers can also investigate the use of an ‘interest only’ or a ‘principal and interest’ repayment loan. An ‘interest only’ loan sees only the interest paid each month during the term of the loan with the full payment of principal due when the term expires. A ‘principal and interest’ repayment loan combines the regular payment of accrued interest plus some of the principal, with a balloon payment of outstanding principal due at the end of term.
For details of these or any other loan choices that could be available make your interest known to your lending institution.
Stage 2: Weighing-up the cost
The primary cost associated with a home loan is the interest rate. But lenders also charge a number of fees, two of which are loan entry fees and ongoing fees or charges. By adding the loan fees and the interest charges for a given loan you will be able to determine whether or not the loan will be competitive with others on offer.
Standard fees & extra costs
The payment of establishment and/or application fees linked to the loan, together with an ongoing fee can be standard. Extra costs can accumulate according to whether or not you ask for additional facilities or services. Do not be afraid to ask for details.
Stage 3: Features you’ll want or need
Today, lending institutions offer a wide variety of features to suit a wide range of consumer preferences. Check them carefully and ask that your loan be tailored to include only those services or features you feel are necessary.
Taking your loan with you
The ability to keep your loan in the event you sell your home or investment property and purchase another is commonly referred to as ‘portability’. Restrictions can revolve around the values of the new versus the old property and a fee may apply. If you plan to sell your property before your loan has run to term it can pay to clarify this matter with your lender before you sign.
Making extra repayments
Making additional repayments that lead to early repayment of your loan can cut thousands of dollars off your costs. You’ll need to receive clear instruction about what your loan will allow and what it will not. Nearly all home loans with a variable interest rate allow the borrower to make additional repayments without penalty. There are, however, some that do not. So this can be an important issue. Make sure you understand the way the lender will calculates and charge you interest, or can limit your right to pay out their loan at any time.
Those seeking fixed interest rate loans also need to address the repayment issue with care. Interest adjustment calculations can come into play with different lenders using different methods. Clarify this matter before you sign for the loan.
Moving from a fixed interest loan to a variable and visa versa can or cannot be done depending upon the loan product under use. Again it can be wise to clarity this issue well in advance to agreeing to the loan.
Using money you’ve paid to the bank
Institutional terms such as ‘redraw’, ‘all-in-one loans’ and ‘100 percent offset accounts’ deal with an ability for you to gain access to money from your loan account. Many restrictions can apply. Minimum withdrawals, transaction charges, credit limits and fees should be well understood before such services are used.
Flexibility can cost
Determining the benefit you will receive from a flexible loan is far from easy. Limiting what you ask the loan to do can be a sensible option. To find out what flexibility will cost ask your lender about:
- Additional repayments fee
- Break cost
- Combination loan fee
- Deferred establishment fee
- Exit fees
- Fee transactions
- Late payment fee
- Mortgage discharge fee
- Ongoing fee
- Portability fee
- Redraw fee
- Refix fee
- Switch to fixed fee
The next step is to enjoy your move into your new home.
Still confused? Need some help?
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