October 06, 2014
When searching for the ideal home loan, borrowers often get caught up looking for a mortgage with the cheapest rate.
While rate will no doubt play an important role in their final decision, it is just one factor at play.
Today, with rates sitting at historical lows, borrowers are guaranteed to secure a competitive rate regardless of which lender they choose to go with. As such, borrowers should take the time to look at the other factors in play – including the type of home loan, its features, and any fees that are associated with the product.
Some of the fees and features that are worth researching include:
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, with an interest only loan you only need to repay 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: If you would like some certainty around repayments, you might consider fixing your mortgage. Of course, it is important to keep in mind that fixed rate mortgages are generally less flexible than variable rate home loans, so you may not be able to contribute extra payments and redraw on them or use an offset account with this type of loan. Further, if you repay your loan within the fixed rate period there may be early repayment fees or break costs. 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redraw facility: Having a redraw facility allows income and/or extra repayments to be put into the loan account, and withdrawn when needed.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. Importantly, borrowers wishing to take full advantage of this product will need to have some budgeting discipline.
Loan fees: When comparing loans, review the upfront and ongoing fees associated with that loan so that you know exactly what you can be expected to pay. Fees will vary from lender to lender, so make sure you do your due diligence and find out which lenders have the lowest fees. Fees can include loan application fees, monthly account keeping fees, redraw fees, additional repayments fees, rate lock fees and break fees.
Lenders mortgage insurance
If you borrow more than 80% of the value of your home, lenders may charge Lenders Mortgage Insurance (LMI). LMI protects your lender in the event that you default on your loan.
Choice of lender: It’s best to first shop around rather than going directly to a lender you already have a relationship with. As your local mortgage broker, I have access to an extensive range of lenders, from the big banks through to smaller credit unions, building societies and non-bank lenders. I can help you survey the various products offered by the different lenders and ultimately find you the most appropriate product for your needs.
Loan term: A loan’s term can impact your repayment amounts as well as the interest paid on the loan. For example, if you borrow $500,000 at 5% over 30 years, principal and interest repayments are $2,684 per month. Total loan costs are $966,278 and the interest component is $466,278. That same loan paid out over 25 years, sees monthly repayments $238 higher but equates to a saving of $89,393 in interest.