Home Loans

Here are some of the areas you should look at when comparing different lenders in the home loan market.

The interest and comparison rates

Your interest rate will determine how much your monthly or fortnightly mortgage repayments are.  If the interest rate goes up on a variable rate loan, your repayments will also increase by the same amount. You can use our loan comparison calculator to compare two home loans side-by-side. For example, on a $500,000 loan taken out over 30 years, a 0.25% increase in the interest rate (say, from 6.00% p.a. to 6.25% p.a.) will result in an additional mortgage payment of around $80 per month, which may add close to $30,000 to your mortgage cost overall.

The interest rate offered should be your main priority in the mortgage comparison process, as even small differences in rates can lead to significant savings.  However, your loan’s comparison rate is a more accurate reflection of the true cost of the loan and is possibly the more important figure for you to compare between lenders.

A loan’s comparison rate is inclusive of both the interest and fees you’ll have to pay on your home loan, so it’s a more accurate representation of what’ll be added to your principal payments. It’s based on a $150,000 loan taken out over 25 years.  This is a standard measure across the whole home loan industry and enables consumers to compare ‘apples with apples’. For example, a home loan with a 5.75% p.a. interest rate but a 7.00% p.a. comparison rate will be far more expensive overall than one with a 6.50% p.a. interest rate and 6.75% p.a. comparison rate. Note that comparison rates don’t include additional fees which you may choose to pay, such as an early exit fee which could be charged if you break a fixed term loan contract.

Loan repayment frequency

Traditionally, home loans were repaid monthly. However, these days, lenders typically also offer fortnightly and weekly instalment options. You can save money paying fortnightly because there are 26 fortnights in a year, rather than 12 months, so you'll effectively be making an additional monthly loan payment per year, thus paying off your loan more quickly and saving yourself interest. In addition, because interest is calculated daily, making payments more frequently reduces the interest you pay overall due to the more rapid decrease in outstanding principal.

These days, fortnightly payments are the most common, with some homeowners even choosing to pay off their mortgage weekly to save even more money. When comparing loans, check that your lender offers you the option to choose your repayment frequency.

Home loan fees 

Whilst it’s inevitable that you’ll have to pay some fees on your home loan, there is the potential to reduce fee payments through careful comparisons. Look for loans which have no account-keeping or monthly fees and compare application and establishment fees.  Standard home loan fees may include:

• Loan application or establishment fee – expect to be charged between $150 to $700 by some lenders
• Ongoing monthly account-keeping fees – between $5 and $15 a month
• Annual package fees – charged by some lenders if you bundle several financial products together, sitting between $200 and $400
• Property valuation fees – between $100 and $300
• Mortgage discharge fee – if you’re refinancing, you may have to pay to discharge your original mortgage, so expect to pay around $350 to $500

It's also important to be aware of early exit fees. These can be charged if you wish to break the terms of a fixed rate loan.  These fees can amount to thousands of dollars depending on the size of your loan, the term of your fixed period and how much of this fixed rate period is remaining when you want to end it. You should always make sure the benefit of refinancing isn’t negated by any fees you incur as a result of doing so.

As an example, let’s say a borrower took out a $500,000 loan over 30 years and agreed to a fixed-rate period of five years with a 6.50% p.a. interest rate. Three years into this agreement, the borrower decides to refinance the loan to one which has a 5.85% p.a. interest rate. In that time, the lender's rates have fallen to 6.00% p.a. Their lender calculates the early exit loss adjustment fee to be around $5,000 and also charges an exit penalty fee of $500, so the borrower is charged $5,500 overall to exit their loan with two years remaining of their fixed rate period.

Other non-bank fees you may encounter when buying a new home include:

• Pest and termite inspection fees – between $250 and $400
• Conveyancing fees – your conveyancer will charge between $800 and $2,000 depending on the complexity of the settlement
• Mortgage registration fees – to register your mortgage with your state’s Land Titles Office, costing up to $200

Deposit requirements 

Many lenders won’t go above 80% for their LVR (particularly the big banks) but other lenders can loan as much as 95% of your property’s value.  When comparing different lenders, it’s important to keep an eye on what their deposit requirements are to ensure you’re able to qualify for the loan you’re after.

Additional and bonus features 

Lenders will often advertise bonus features as a sweetener to attract new clients.  Some of these may include: 

• A honeymoon interest rate: this is an introductory home loan interest rate designed to attract new client attention, but they usually only last from six months up to a year or two before reverting to a more standard interest rate. When comparing such loans, check if the introductory offer really does represent good value. 
• Free additional or early repayments: some lenders can be strict when it comes to the additional repayments you can make on your home loan, particularly if you have a fixed rate loan. Look for a lender who won’t charge you to make extra contributions to your loan amount (or, if you have a fixed rate loan, look for a generous additional repayment allowance such as $20,000 p.a.). You can use our extra repayments calculator to see how making extra repayments regularly on your home loan can help you pay it off far sooner and save you plenty in interest.
• A mortgage offset account: this is a particularly useful tool when it comes to reducing the amount of interest you’ll pay on your loan, as every dollar you have in your offset account will reduce the interest you pay on the principal of your loan.
• Portability: this feature allows you to keep your existing home loan but change the property which secures it, which is also known as ‘security substitution’. In effect, you take your home loan with you when you move house.
• Redraw facilities: if you’ve been making extra repayments off your loan but suddenly need more funds, a redraw facility will allow you to withdraw your additional funds back out from your loan account and use them. Redrawing from your mortgage could be a far cheaper and more manageable option than using other, more expensive options to give you quick access to cash if an emergency should arise.