Comparing home loans is an important process in finding the best home loan, but it can be overwhelming with so many loans on the market.
It can be fraught with danger especially if you only look at only one factor like the interest rate. Find out the different things you should consider and how you can compare home loans effectively.
Looking at different advertised home loan rates is a good start, but it’s not enough to get a true, realistic comparison. Listed below are the factors you should consider when home loan shopping.
This is one of the biggest factors to consider when comparing home loans. When you are looking at interest rates make sure you understand what you are looking at and whether it is suitable for your circumstances. Here is a quick run down on some of the different home loan interest rates available:
Variable rate: The interest rate on a variable rate home loan fluctuates depending on the cash rate and your credit provider. They tend to offer the most flexibility and features but if interest rates change so will your repayments. This can make it difficult if you are on a tight budget.
Discover more about finding the best variable rate home loan.
Fixed rate: A fixed rate is when you lock in an interest rate for a certain number of years, usually 1-5 years. During this time your repayments will remain the same.
Fixed rates are also known for not having as many extra features and less flexibility to change loans or lenders without incurring break costs.
When comparing, ask what features and limitations come with the loan. Some will offer very few features and not allow you to do things like pay extra or redraw while others offer a range of features.
Read more about how to find the best fixed rate home loan.
Introductory rate: If you see a really low interest rate advertised that looks almost too good to be true, check the fine print. Introductory rate loans offer a discounted rate for 1 or 2 years at the start of the loan that then reverts to a higher rate ongoing. Although it might be very attractive at the start, you need to calculate the total cost over a number of years or how long you would look to stay with the one lender. Compare this with a comparable rate that is ongoing.
Split loan: A split home loan is when you divide your home loan amount into different portions. You choose how much to allocate to each portion and what type of interest rate that applies. For example, to spread the risk you could choose a number of fixed rate portions for different terms, and combine this with a variable potion.
This may be a bit more complicated to compare as you need to look at multiple interest rate options. To get an accurate comparison, speak to your lender about the portions you want.
Interest only: An interest only home loan is when borrowers only have to pay the interest as well as any fees for a fixed period of time, usually five to 10 years. Some lenders will have a higher interest rate for interest only home loans. If you are looking for this option, it pays to shop around, comparing interest only options with different lender.
Find out more about interest only home loans.
Investment: Due to recent changes, many lenders offer specific interest rates for investment loans. Some attract a higher rate if the loan purpose is for investment while others apply it to any loan with an investment property as security. If you shop around you may be able to secure a lower rate by using your own home as security for investment lending but it would pay to get tax advice as to whether this is acceptable.
Loan to value ratio: The amount you borrow compared to the value of the property can see you paying a different interest rate for the same loan. Always give the lender the full scenario of what you are looking to do so that they can advise what interest rate will apply.
First, decide which type of interest rates is going to be the best for your situation and then make sure that you have the correct rate and are comparing “like with like. Other differences can then be highlighted for each option to help create a shortlist with pro’s and con’s.
The comparison rate is required to be shown alongside the interest rate and is designed to help borrowers compare loans more easily.
It is a standardised calculation of what the interest rate would be if you added in the fees. To keep it simple it is calculated on a loan amount of $150,000 and a loan term of 25 years. It is handy to give you some insights into the loan before you even read any of the details. At a quick scan you can tell if there are upfront or ongoing fees if the comparison rate is higher than the interest rate. If they are the same or very close it could indicate that the loan has minimal setup costs and no ongoing fees.
While this is a handy calculation to have on every loan, it should not be used to determine the best interest rate for you as it is only true for loans that match the critieria ie $150,000 loan amount and a 25 year term.
Keep your eye out for a personalised comparison rate calculation. This is the same type of calculation as a comparison rate but is tailored to your loan amount and loan term. These can be found in some repayment and loan comparison calculators as well as in Key Facts Sheets. You can then use your personalised comparison rate to compare loans with different interest rates and annual or no ongoing fees.
Most loans come with a range of features, so when comparing different home loans, you should take into account the type of features available. You may not use or need the full range of features. Work out which ones you need and ensure you are not paying extra for the other features you may not even use. Also have a think about the value of the extras that come with the loan. It may sound like you are getting a whole heap of things for free but in reality they may not be worth a lot to you.
Some of the most common features include:
Common home loan features
- Offset account
An offset account is like a savings account that is linked to the loan. When interest is calculated the funds in the offset account and added to the loan so that interest is calculated on the lower amount. So, you’re not earning interest on your extra money, but reducing the interest being charged on your loan increasing your equity.
- Ability to pay extra
Paying more than the minimum repayment can reduce the amount owing and also help you pay off your home loan much quicker.
- Free redraw
You are able to put extra towards your home loan, but still able to access this extra cash and withdraw it if you need to.
If your loan is portable, you are able to sell your home and purchase a new one without having to change loans. In effect the loan stays the same but lender releases your current home as security for the loan and replaces it with the new property.
If you want to split your home loan up into fixed, variable and/or interest only portions, this feature allows you to do so.
Although these extra features may be handy, if they come with additional fees, check that the cost doesn’t outweigh the benefit.
Fees can make all the difference when it comes to how much you can save. There are both ongoing and upfront fees you should be comparing with different loans.
Upfront fees can include:
- Valuation fee
- Legal fees
- Title insurance
- Application fee
- Lenders Mortgage Insurance
Fees during the life of the loan:
- Monthly or annual fees
- Fixed rate break fees
- Late payment fees
- Cost of accessing certain features :
- Fees to redraw
- Fees to have an offset account or
- Fees for excess transactions
Fees at the end of the loan:
- Discharge fees
Other fees will apply regardless of which lender you choose and includes state government registration and transfer fees and stamp duty. When speaking to different lenders, make sure you ask about what the fees specific to the loan you are interested in and keep track of how they vary with different lenders.
Find out in detail about what each of these fees mean.
Key Facts Sheets
There can often be a trade-off between interest rates and other benefits, and fees. A Key Facts Sheet can give you a snapshot of your loan amount with the fees added in, giving a total cost for the life of the loan as well as a personalised comparison rate. They are available for most loans on the market and can be used to compare different loans side by side.
For a Key Facts Sheet for a State Custodians loan Click Here
Canstar ratings represent a shortlist of financial products that have been assessed and ranked by expert researchers.
Rankings range from 1 to 5 stars. Five star products are considered as outstanding value for consumers and only 5% of the loan available in the market achieve a five-star rating. As these ratings are assessed by a reputable industry expert, it can help you narrow down your search for the right home loan.
Reviews on public websites will give you realistic feedback about how happy customers are with a certain lender. You can get a sense of what type of service you can expect and whether it is high quality or not.
Do an internet search of "reviews" and the lenders name. You will come up with a different website where people have left reviews for particular lenders.
The mortgage industry has a range of annual awards not only for lenders, but specific home loan products too. Awards give recognition to lenders for their high quality products and/or customer service. If you are having trouble narrowing down your list, take a look at awards on a lenders website or speak to them directly about their awards history.
Knowledgeability of staff
The right lending team can make all the difference to the home loan process. The last thing you want is to be going back and forth with someone who makes the process more confusing.
When narrowing your search, speak to different lenders about your options via email and phone and make sure to ask plenty of questions. This will give you an idea about how knowledgeable staff are and also take note of the response time. If they take days to respond or don’t answer your questions, it could be a red flag.
Even if you know what information to use when comparing home loans, how can you compare impartially?
Compare apples with apples
It is important not to just compare a list of different home loans. Fixed, variable, interest only and introductory rate home loans each have their own benefits and pitfalls. Decide on what type of home loan rate you want first and then compare this type of rate with different lenders.
Use your own loan amount when comparing
Ensure any calculations are done using your loan amount so the difference between loans is specific to you. Also, ensure that you make enquiries with the lender about what rate applies to your loan amount and don’t just rely on headline rates in your comparison.
Use a reasonable time frame
Although the home loan term is usually 30 years, it’s worth comparing a shorter term too. Over time, your loan may become less competitive which is why refinancing every 5 – 10 years is not uncommon.
Although most calculators will give you a comparison between two loans over the full term, you should also do a calculation of how much they differ if you only stayed with the one lender for a shorter term like 5 or 10 years. This may help in your comparison and give you a more realistic view of how much you will actually save with one loan versus another.
Decide what features you need
Most lenders offer a range of home loan features, but some come at a cost. Before deciding on a home loan, you need to think about what features you need and what you can live without. Some of the most common features on offer include:
- Offset account
- Extra repayments
- Free redraw
When comparing home loans, you need to think about the potential savings certain features can offer as well as the interest rate. For example, one lender may offer a home loan with a slightly higher interest rate, however it may come with the ability to make unlimited extra repayments and redraw for free. Being able to do this could allow you to get all your spare cash working for you by reducing the interest charged on the loan whilst still having access to anything extra you have paid.
If you want features like an offset account but can’t justify an annual fee based on your loan amount, keep researching. There are loans with offset accounts, which have a competitive interest rate that don’t have annual fees. Check out our Breathe Easy Loan here as an example.
Make enquiries with the lender
This is one of the best ways to ensure you are comparing the correct information. There are different scenarios that can affect what interest rate will be including:
- Different LVR’s
- Owner occupied or investment loan
- Interest only or principal & interest
When it comes to choosing a home loan, it’s not just a matter of plucking two products out of the air and choosing between them. The more research you can do about what type of lender and home loan you want; the better chance you will have of saving more.
The best way to start comparing home loans is to do it yourself! There are a range of online tools and websites that can help narrow your search.
Loan comparison calculator
Online calculators are quick and easy to use and can give you answers straight away. You can enter in different loan amounts, loan terms, interest rates and fees to find out what the repayments will be and which one will save you more over the loan term.
Loan comparison calculator
Compare two different home loans easily with our Loan Comparison calculator.
Comparison websites compare a number of different lenders and home loan products. Websites such as Canstar are a good place to start. Simply type in the type of home loan you are interested in and you will be able to compare them side by side.
Key facts sheet
The Key Facts Sheet will give you a personalised comparison rate which includes the ongoing fees and interest rate for your specific loan amount. This information will help you compare different lenders and their rates side by side.
For a Key Facts Sheet for a State Custodians loan Click Here
Google is a handy tool to use when home loan shopping as you can search for exactly what you want. For example, you may be looking for lenders who offer a specific extra feature.
Also, not all lenders are featured on comparison sites, so by doing your own search, you get a better idea of what is available across the market.
If you find the home loan process overwhelming, you may want to consider a mortgage broker. Brokers can help you from the start, providing a number of potential home loan products that would suit your requirements, submitting the application to the lender you chooose and looking after the application until settlement.
Although mortgage broker can help save you time there are a few pitfalls to be aware of:
- Brokers only have access to a limited panels of lender, so you may not find out about lenders who are not on their panel or who don't offer their home loans through brokers.
- The process may be delayed if the broker is too busy and doesn't have enough support.
- You won’t get to know the lender as the broker looks after all the interactions for you. This means you won’t get a feel for how professional or helpful the lender actually is.
- An inexperienced broker may submit multiple applications which will result in more enquiries on your credit report. A broker should run your scenario past the lender before submitting to ensure your application is being submitted with a good chance of being approved.
Find out what you need to know when using a mortgage broker.
State Custodians has a range of online tools to help you compare different home loans. You can also chat to our friendly Lending Specialist team and they can go through different scenarios with you one on one. Give them a call on 13 72 62 or leave your details here and they will contact you.