January 25, 2012
Borrowers 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.
When choosing a home loan, there are many aspects beyond the current rate that impact the cost of your loan over its lifetime.
What lies beneath should be paid just as much attention, such as other features needed now or in future, the fees that 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 and fess worth considering when choosing a loan include, but are not limited to:
- Principal and interest versus interest only loans: Principal and interest loans require borrowers to make regular monthly or fortnightly repayments against the principal (the borrowed amount) as well as paying part of the interest accrued on the loan. In comparison, interest only loans require borrowers to repay only the interest accrued during the term of the loan; therefore, repayments are lower than with a standard principal and interest loan. At the end of the interest only period - usually one to five years – the loan reverts to a principal and interest loan.
- Fixed or variable rate: Borrowers needing certainty over repayments might consider a fixed rate loan, however these may not offer all the features needed, such as the ability to contribute extra payments and redraw on them or use an offset account. Keep in mind if you repay the loan within the fixed rate period there may be early repayment fees or break costs. Fixed rates could also cost more in the long term, especially if, during the fixed term, rates fall as they have been on late. 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redraw facility: Having a redraw facility allows income and/or extra repayments to be put into the loan account, and withdrawn when needed. Rather than earning interest, the funds drop the principal loan amount, reducing the interest owed on it. This does take budgeting discipline.
- Loan fees: When comparing loans, review the upfront, ongoing and exit fees so you know exactly what you will pay over the life of the loan. They vary according to the loan and lender you chose. Costs may include loan application fees, monthly account keeping fees, redraw fees, additional repayments fees, rate lock fees and break fees. Exit fees on new loans were banned from 1 July 2011, but they may still be charged on loans settled before this time.
- Lenders mortgage insurance If you borrow more than 80% of the value of your home lenders may charge lenders mortgage insurance (LMI). LMI protects lenders against borrowers that are unable to repay a loan. LMI can cost thousands of dollars.
- Choice of lender: It’s best to first shop around rather than going directly to a lender you already work. Australian borrowers have access to an extensive range of safe lenders, ranging from big banks through to smaller credit unions, building societies, non-bank lenders and others. Lesser known lenders also offer competitive deals in terms of interest rate and the available features and fees charged; looking at a complete set of options is a clever move.
- Loan term: The length of a loan’s term impacts the repayment amount and interest paid in 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 $137,376 in interest.
For more information contact Richard Windeyer on 1800 01 LOAN or click here to "Book a Meeting"