Choosing the right home loan is just as important as choosing the right property -- you need to consider your individual circumstances and make sure you make the right decision for you. Signing on the dotted line of a home loan contract that doesn't suit your needs could lead to being locked in to paying for features you don't need and suffering plenty of distress further down the line, so it certainly pays off to take a little extra time and choose the very best one for your circumstances!
Take the time to investigate all of the options available to you and identify the pros and cons of the various home loans on offer. Talk to mortgage brokers, banks, trusted friends and experienced property investors to get a better idea about what's out there, and what you may and may not need.
There are many different factors you need to consider when searching for a home loan, so we've put together a basic list of things you need to think about to get you off on the right track. Of course, this is not an exhaustive list and you should always seek professional advice before signing any contract.
Think about the amount you want to borrow -- and how much you're realistically capable of paying back. Just because a lender offered you a certain amount, it doesn't mean you should take it. Consider what would happen if your circumstances changed, like you lost your job, you got sick or your variable interest rate rose. Don't stretch yourself financially or it could be a very distressing 25-30 years.
If you haven't saved much for a loan deposit, you may have to pay lenders mortgage insurance (LMI). This is generally required if you're borrowing more than 80 per cent and protects the bank in the event that you default on your mortgage repayments.
There are many different types of loan products on the market. The most common include:
- Basic variable: Your repayment amount will vary, depending on the interest rate at the time.
- Standard variable: As above, but usually with more flexibility in terms of features.
- Fixed rate: The interest rate is fixed for a certain period of time, e.g. one year or five years.
- Split/combination: This is a combination of a standard variable and a fixed rate home loan.
- Introductory/honeymoon: This offers a lower interest rate for a short term, usually the first 12 months of your home loan, which then reverts after the intro period.
- Low-doc: This is for borrowers who don't meet the usual criteria for a home loan, e.g. the self-employed or those with a poor credit history.
Some loan features are essential, while others may not be applicable to your individual circumstances. Consider these common features and whether you need them or not.
- Additional repayments
- Redraw facility
- Changing the frequency of repayments
- Direct debited loan repayments
- Offset account
- Salary credit
- Repayment holiday
Fees are another key consideration when shopping around for home loans. While the features above may sound appealing, many may come at an additional cost. Loan fees can include:
- Application/start-up fee
- Valuation fee
- Account transaction fee
- Switching fee
- Ongoing monthly/annual fee
- Redraw fee
- Exit/discharge fee
- Refinance fee
- Early loan payout fee
Make sure you hit up an online comparison tool to find out the "true" cost of the loan, which takes into account the interest rate as well as other fees and expenses.