How to Choose a Home Loan
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One of the biggest decisions you’ll have to make when buying a house is which home loan to go with, so we’re here to help inform you on how to choose one. Read about some of the top home loans available to you now and how to compare them in our comprehensive guide.
How do I choose between different types of home loans?
There are several decisions you need to make that will inform your choice of home loan. One of the most significant of these is the interest rate and how you choose to configure it. Two of the most common forms of these are variable rate and fixed rate home loans. These loans are created by the choice of either locking in your interest rate for a select period (fixed) or leaving it open to market movement (variable). You can also elect to go with a split rate home loan, which will be divided between both fixed and variable rates over the life of the loan. Each of these loans come with different conditions that will alter the overall interest that you’ll pay throughout the repayment cycle.
PROS
Fixed rate: effective budgeting
Knowing what you’ll be paying back for each instalment allows for more accurate budgeting into the future
Fixed rate: avoiding interest spikes
You’ll be protected against any potential rise in interest rates
Variable rate: flexible repayments
Generally, these have more relaxed conditions when it comes to making early or extra repayments
Variable rate: escape quickly and easily
They also tend to be easier to exit if you decide to switch to another loan or lender
Split rate: personalise your loan
Easily adjustable to your liking, allowing you to split your loan into whatever proportion of fixed and variable that suits you (e.g. 50:50, 75:25)
Split rate: the best of both worlds
Enjoy the benefits of both fixed and variable, such as repayment flexibility and security
CONS
Fixed rate: locked in
You won’t be able to take advantage of interest rate falls
Fixed rate: rigid payment structure
Lacks the flexibility of variable rate home loans when it comes to making repayments
Variable rate: monthly uncertainty
Not knowing exactly how much you’ll be paying for each instalment makes budgeting more difficult
Variable rate: market rise = bad news
Leaves you open to the possibility of paying more, should interest rates rise
Split rate: costly break fees
It could be difficult to break your loan without forking out for an expensive fee
Split rate: twice the loan, twice the fees
Having your home loan effectively separated into two accounts, paying back fees on both can prove costly
When choosing my home loan, what fees will I have to look out for?
Each home loan will carry with them unavoidable fees so, when it comes to choosing your loan, you should always look at how each of these will impact you financially. Borrowers may find that certain lenders will waive certain fees or offer discounts, which can prove crucial in reducing the overall amount you end up having to repay.
Application or establishment fees are the first major fee that you’ll have to pay, which can cost you up anywhere between $150-$200 all the way up to $700. This charge will depend on the size of your loan.
A property valuation is also conducted at the start of the loan process and will set you back several hundred dollars.
The conveyancing fee, which is the transfer of the property’s title to you from the seller, can cost as much as $2,500, with a typical minimum of $700.
Monthly fees will be built into your repayments and are an insignificant charge for each instalment of between $5 and $20.
Annual fees are likely to cost you $300-$400 on package home loans, which contain discounts in other areas such as interest rates.
Discharge fees will be charged once your loan has been paid off, a payment of up to $500 to cover the end of the process.
Some lenders may also enforce break fees on fixed rate loans if you choose to switch to a different loan and redraw fees for withdrawing extra repayments, but these will vary across the board.
| Fees | Cost |
|---|---|
|
Application/establishment fee |
$150-$700 |
|
Property valuation fee |
$200-$600 |
|
Conveyancing fee |
$700-$2,500 |
|
Monthly fees |
$5-$20 per month |
|
Annual fees |
$300-$400 per year |
|
Discharge fee |
$350-$500 |
|
Redraw fees |
Up to $50 |
|
Break fee |
Dependant upon loan conditions |
Should I compare comparison rates between home loans when making my final choice?
Yes – comparison rates are the truest indication of the amount you’ll be paying in interest and fees combined. Lenders may offer a low interest rate which catches your eye, but the comparison rate is always a crucial consideration when deciding on how much you’re willing to pay per month. As discussed above, each lender will have different policies regarding how much each fee costs and which ones they’re willing to waive, so it’s important to have a strong grasp of that entering the application process. Financial comparison sites like Savvy always include the comparison rate of each lender to provide you with as much information as possible to help you with your decision.
What are some of the features I should consider when I choose my home loan?
Lenders will often build features into their home loans to sweeten the deal. Package home loans are a prime example of this, as they are defined by the products that their lenders bundle in. Take a look at some of the most common home loan features below.
- Discounted interest rates often feature prominently in package deals as a main draw.
- Offset accounts allow borrowers to reduce the overall amount they have to repay with interest. For example, if you set up an offset account with $10,000 on a $400,000 home loan, you’ll only pay back $390,000 with added interest.
- Redraw facilities can add flexibility to the overall loan process by allowing you to access extra repayments that you’ve made towards your home loan. This may be useful in the event of an emergency.
- Honeymoon rates are offered by some lenders, which function by starting at a basement level of interest initially before reverting to a regular home loan after 12-24 months.
- Interest-only home loans only charge the interest payable on the loan for a period of up to five years, which can free up funds early in the home loan repayment cycle.
- Low doc home loans are suited to those who may not have easy access to the required paperwork, such as investors or self-employed workers.
- Self-employed home loans also appeal more to self-employed home loan seekers as a more suitable way to submit their applications.
Top tips on how to choose a home loan
Know where to look
Where you look for your home loan will have an impact on the amount of information you’ll find to compare between lenders. Savvy is always a great place to start in the research process, as our financial comparison tools are designed to contrast points of difference between each loan, such as interest and comparison rates, monthly repayments and more.
Check the interest rates
Interest rates are an easy point of comparison between lenders, as they will always sit prominently on their websites. While this is a particularly important factor in your decision-making, prospective borrowers should also always consider a loan’s comparison rate in addition (as mentioned above).
Compare monthly repayments
Monthly repayments are another factor that is likely to inform your choice of home loan. These will be shaped largely by the amount you decide to borrow and the loan term that you choose, alongside its interest rate and built-in fees. The less you have to pay in fees over the course of your loan, the better, so they’re important to monitor.
Consider any other features
While a home loan’s extra features might not be as crucial in the long term to your final choice, they’re always worth considering. Discounts on interest rates, as well as built-in elements such as offset accounts, could prove to be a major comparison point between lenders.
