November 22, 2013
David Thomas, Bayside.
Don't go straight to rate when choosing a loan. Those who look beyond the interest rate horizon when choosing a home loan often stand to benefit in the long run.The rate usually captures borrowers’ attention when hunting for the best deal, but it shouldn’t blind them to the many aspects worth focusing on when weighing up loan options. Consumers often think they’re home and hosed when they’ve found a loan with a competitive interest rate. But the rate is just the beginning.What lies beneath should be paid just as much attention, such as other features needed now or in future, the fees - some of which may go unnoticed until the mortgage is in full swing - and the quality of service. These factors will help ensure borrowers settle in for a comfortable home loan journey.Features worth considering when choosing a loan include, but are not limited to:
Fixed or variable rate: Borrowers needing certainty over repayments might consider a fixed rate loan, however this may not offer all the features needed, such as the ability to contribute and redraw extra payments or use an offset account. The loan could also cost more in the long term, especially if, during the fixed term, rates fall. It depends what the market does and how the borrower feels about strapping into the rate rollercoaster. Splitting the loan amount across part fixed/part variable may be a good compromise for those seeking some stability along with flexibility.
Loan redraw facility: Having a redraw facility within your home loan allows your income, savings and/or extra repayments to be put into the loan account, and withdrawn when needed. Rather than earning interest in some kind of savings account, which is taxable, the funds drop the principal loan amount, reducing the interest owed on it. This does take budgeting discipline to manage well.
Loan fees: There are many kinds of home loan costs borrowers may incur, including application fees, monthly account fees, redraw fees, additional repayments fees, rate lock fees and break fees. A qualified mortgage broker can provide a full list of features and fees for each home loan option.
Choice of lender: It’s best to first shop around rather than going directly to a lender you already know. Australian borrowers have access to an extensive range of safe lenders, from big banks to smaller banks, credit unions, building societies, non-bank lenders and more. Lesser known lenders also offer competitive deals; looking at a variety of products and providers is a clever move.
Loan term: The length of a loan’s term impacts the repayment amount and interest paid over its lifetime. For example, if you borrow $500,000 at 7% over 30 years, principal and interest repayments are $3,327 per month. Total loan costs are $1,197,544 and the interest component is $697,544. That same loan paid out over 25 years, sees monthly repayments $207 higher but equates to a saving of $137,375 in interest. Handy online loan calculators provide such insights.
Loan top up: It helps to think longer term about loan features that may be handy down the track, such as a loan top-up feature. This allows you to increase the home loan’s credit limit to fund, say, a renovation. This is commonly used by those who want to access built up equity in their property.Anticipating your needs well into the future isn’t easy, but starting out with a sense of features you’re likely to want in the years to come can save much time and hassle.
For more information call David Thomas on 07 3286 7711, or book a meeting.