To achieve your dream of owning a home, you will have to choose the right home loan. The Reserve Bank is attempting to curb inflation by raising interest rates again in October so finding the perfect loan is more important than ever. Over the course of the loan, even a small difference in interest rate can make a big difference.
If you are looking for the best home loan interest rate, you have a lot to take into account. A family’s top priority should be to avoid mortgage stress, which occurs when monthly mortgage payments exceed 30% of pretax income. In defaulting on a mortgage, serious consequences follow. There is also the possibility of losing your home and being unable to obtain another mortgage for several years, in addition to the financial penalties.
People who can pay off their debts faster may benefit from flexible loans because they can save considerable amounts of money. A sense of peace of mind is also important, but all these things come at a price. Take a close look at whether these extra costs are always worth the extra features and keep an eye on interest rates. Few questions you need to ask from real estate agent or builder or mortgage broker before buying a property
Is there a minimum deposit required?
Typically, a smaller deposit requires you to take out Lenders Mortgage Insurance (LMI), which increases the monthly repayments. If your deposit is 20% or more, you will not need to pay this insurance fee.
You can receive a loan with a lower deposit, but you’ll have to pay more interest, and you’ll have to make higher monthly payments. Typically, lenders determine their lending capacity based on loan-to-value ratios (LVRs). Loan-to-value ratio refers to the ratio between the loan amount and the value of the purchased property as determined by the bank. Percentage is used to describe it. A borrower will generally need lenders mortgage insurance if the bank is lending more than 80% LVR.
To calculate your LVR, use the government’s MoneySmart calculator.
Buying a first home? Get a grant
First Homeowner Grants are designed to help people purchase their first home. As outlined below, this is a national scheme but funded by individual states and territories.
VIC: There are grants up to $20,000 in regional Victoria, and $10,000 elsewhere. The stamp duty tax may not apply to first-time homebuyers who buy a new or established home valued at less than $600,000, and the tax may be reduced by up to 50% if the home is worth $600,001 to $750,000. Applicants must meet eligibility requirements.
NSW: You can apply for grants up to $10,000. Stamp duty is not applicable to new properties worth up to $650,000. Depending on eligibility criteria, properties between $650,000 and $800,000 may qualify for a partial concession.
NT: The amount of the grant is up to $26,000. The first home buyer is entitled to a $23,928.60 stamp duty concession, if they are not eligible for the grant scheme. Grants of $7000 may be available to those buying a second property or building a new home. The government may be able to grant a grant of $10,000 to senior citizens, pensioners, and those who help the elderly.
Tasmania: Grants up to $10,000 are available. Pensioners and first-time home buyers may qualify for duty concessions if they settle in a new home before their settlement date and meet the other requirements.
QLD: Grants up to $15,000 are available. In addition to stamp duty concessions for first homes or property used as a principal place of residence, there are also concessions available for vacant blocks if the buyer intends to build on them. Each concession has its own eligibility criteria.
ACT: Grants up to $7000 are available. A concession is available for a new home or a block of vacant, residential land. Applicants must meet eligibility criteria and the concession is conducted on a sliding scale based on the value of the property.
SA: Grants up to $15,000 are available. Only off-the-plan apartments qualify for stamp duty concessions. A concession’s amount depends on when the contract is signed.
The importance of saving up and getting pre-approval
Home ownership is a huge commitment that requires discipline to repay the loan. It takes time to save for a deposit, so most people find that setting up automatic withdrawals from their paycheck into a separate savings account can help them.
When you reach your target for your deposit, it is time to get preapproved for a mortgage loan. When this happens, a lender has agreed to lend a specific amount of money to purchase a home. The maximum available funds aren’t a final approval, but they serve as a good indication of how much you can borrow.
You can also use it to refine your search and to bid with confidence at the auction. It’s a thrilling part of the process.
A three-tiered home loan system
A home loan can be classified into three types: basic, standard and package.
Basic : This type of loan features a low interest rate, but is limited in terms of features. If you plan to make extra payments and take them out later, this might not be the best option, since there are fees and restrictions involved. These basic loans do not have many features, which means they are no-frills.
Standard: Standard home loans are more flexible than basic loans in that they allow you to redraw extra money borrowed. In addition, the loan can be converted to a fixed rate or divided into a fixed and a variable rate. It is also possible to establish a 100% offset account.
Package: In a package loan, a standard loan is combined with a discount on interest rates of up to one 1.2% that depends on the amount of loan. However, package fees of up to $400 per year may apply to this loan, making it less expensive than many basic loans. Depending on the lender, you may be able to get a free transaction account or an annual fee-free credit card.
Repaying the interest
To structure the loan, a homebuyer can choose between several options:
Principal and interest loans (P&I)
With principal and interest loans, your monthly payments go both towards the loan’s interest and its principal, the loan amount. Extra payments toward the principal balance will lead to a quicker repayment and a lower overall loan cost.
In the interest of being mortgage-free as soon as possible, owner-occupiers tend to favor a P&I loan.
Interest-only loans
Initial mortgage repayments usually only cover interest during the first two years. As a result, the debt does not change; you are merely reducing interest payments. During the interest-only period, repayments may be lower, but they will rise in the future, so be sure that the loan will still be affordable once both interest and principal are paid off.
Interest-only loans are common among property investors as they don’t plan on paying off the home loan in full. Rather, they sell the property for a profit within a few years. Naturally, this is a risky strategy that is completely dependent on the property market’s annual growth.
Variable rate home loan
Interest rates on this type of loan can fluctuate over time as the official cash rate is raised and lowered by the Reserve Bank of Australia.
Variable interest rates have many advantages:
Whenever interest rates decrease, you’ll be able to save money since the balance will be subject to less interest.
Using it can help you pay off the loan faster, since there is no limit on how many extra repayments you can make.
Savings can be made by using an offset facility to offset the interest portion of the loan.
Disadvantages of variable interest rates:
In the opposite case, if the interest rate rises, there will be more interest due than when the loan was first taken out.
A greater level of uncertainty is associated with this type of loan due to its sensitivity to the movements of the Reserve Bank of Australia.
Fixed home loans
Home loans that are fixed have a fixed term and are not subject to renewal. Having a clear understanding of your repayment amount allows you to budget with confidence, since higher interest rates will not affect homeowners. A downside is the inability to benefit from lower rates.
Pros of fixing the rate:
It is extremely common for first-time home buyers to fix their interest rate because it provides a sense of security for their household budget.
If interest rates rise during your fixed rate period, you will not be caught off guard.
Cons of fixing the rate:
The loan cannot be redrawn or made more quickly repayable through extra repayments.
Despite a decrease in rates, the higher rate will still be charged until the fixed rate loan term is completed.
Additionally, refinancing usually carries ‘break’ or ‘exit’ fees.
Split loans, also known as partly fixed loans, are another option as an alternative to making the difficult choice between a fixed rate and a variable rate. At any time during the loan’s life, the home loan can be split, meaning a portion of it has a fixed rate, and the rest has a variable rate.
Home Loan Comparison
Several factors should be taken into account when comparing home loans, but among the most important vital are:
Interest rate
Interest rates are charges by lenders for borrowing money. It refers to the percentage of the loan amount that is being repaid, and the goal is to lock in the lowest possible rate.
Comparison rate
A comparison rate takes into account the interest rate, fees, and charges associated with the loan. A comparison rate represents the true cost of a loan for the borrower and can be viewed as a more accurate interest rate for your purposes. Generally, the lower the difference between the advertised rate and the comparison rate, the better the deal.
Monthly repayment amount
Each month, you will need to pay this amount to the bank or financial institution. If you spend more than 30% of your pre-tax income on home loan repayments, your house could be in financial trouble.
Annual fees
Depending on the package home loan, a lender may charge an annual fee if it is linked to special discounts. Don’t go over your budget unless you’re comfortable doing so.
Are there Additional Features?
Also, you should find out whether your home loan includes any additional features, such as an offset account where salary and savings can be deposited to reduce the remaining balance on the loan, or whether you can make additional repayments without incurring fees.
You may also want to check whether the loan includes a repayment holiday that allows you to break the repayment schedule when it is difficult to make them, such as when changing jobs or being injured for a short amount of time. During Covid-19 lockdowns, many banks offered repayment pauses to customers in need.
Paying off your loan faster
In most cases, a loan is for a period of 25 years or 30 years. There can be significant differences in the monthly repayment amount over those five years. Despite the fact that you may feel as if it is advantageous to pay less each month, it actually adds up to a higher interest rate in the long run.
Make sure you choose the shortest loan you can without causing financial stress. Whether that’s 15 or 25 years may depend on the situation.
Home Loan Calculators: Which Are the Best?
An excellent tool for determining your home loan costs, your monthly payments, and the difference paying a little extra each month will make on your loan is a calculator.
The Federal Government offers dedicated calculators for home loans on its Moneysmart website. You can use tools available on our website too here
A list of common home loan fees
The fees you pay at the time of buying a property may seem small, but they add up over the course of the loan, so make sure you know your true costs up front. There are a number of mortgage fees that you should be aware of:
Exit fees: An early termination fee can be incurred if a loan is repaid before its term is up.
Redraw fees: A redraw fee is charged by the lender when a borrower takes money out of his mortgage.
Break fees: When a borrower changes loan product, interest rates or payment types during a fixed-rate loan, the lender receives a break cost as compensation.
Account-keeping fee: A lender may charge these fees in order to cover some or all of the costs associated with administering the account internally.
Lender’s mortgage insurance: A lender buys LMI insurance to protect itself against the risk of a borrower defaulting on their loan repayments and having the house sold below the loan balance.
Valuation fees: A third-party valuer will estimate the property’s value and charge the homeowner for the cost of the assessment.
Switching home loans or refinancing
Home loan refinancing refers to switching from one loan to another. Savings can be significant, regardless of whether you use a new lender or the same one. As the home loan market continues to evolve, and offers better deals to new customers, it’s worthwhile keeping an eye out for better options. Additionally, ensure you are not paying for features you are not using.
A home loan refinance can be beneficial for several reasons. This may simply be to take advantage of a better interest rate, or to switch from a fixed to a variable rate, or to borrow more money for home improvements.
If you’re interested in switching lenders, ASIC offers some expert advice. However, before you do, you can always touch-base with us for our friendly advice as to what fits best to your requirement. It may be staying with the current lender or getting some better deal if you switch to other lender.
There was a time when the big four banks dominated the home loan market in Australia – ANZ, Commonwealth, NAB, and Westpac, but now a vast array of lenders are competing, and we can negotiate for you.
Reach us on info@real-mortgage.com.au or 047 044 0347