Possibly the most important home-buying decision you have to make, other than selecting your property: finding a home loan that suits you. There’s a lot more to it than just finding the lowest rate, so let’s get started.
Fixed or Variable rate?
This choice is at the heart of it. Which way you lean will essentially depend on whether you place a greater priority on security and predictability, or flexibility and opportunities to save.
Fixed rates allow you to lock in an interest rate for an agreed period (usually one to five years), after which you can have your loan convert to a variable interest rate or select another fixed-rate period. Their key benefits are:
• The ability to confidently budget around unchanging repayments.
• Protection against market interest rate rises.
Fixed rates are excellent if you’re borrowing at or near your repayment capacity and need to ensure your repayments won’t rise. They’re also a sound choice if other financial commitments in your life are likely to increase, such as through the arrival of children, or costs associated with them.
Most fixed-rate loans do provide the ability to make extra payments, and offer the flexibility to redraw those additional repayments if you need to. But the total amount of additional repayments you can make per year will be limited. Similarly, if you want to pay out the loan early, you’ll likely be charged a fee.
Variable rates, on the other hand, fluctuate with market conditions and can change many times over the term of a loan. Their benefits typically include:
• The chance to save money through lower repayments when rates fall.
• The opportunity to pay off your home loan faster, with no limits on additional repayments or redraws, and no penalty for early pay-out.
Variable rates make a lot of sense if you’re relatively comfortable financially, and will be able to absorb rate rises of at least three to four per cent.
What about a bit of both?
Even the experts can have differing opinions on when and when not to fix your rate, so if you remain undecided you could consider a Split Loan. As the name suggests, this involves splitting your loan in two, with one portion subject to a fixed-rate term and the other a variable rate.
This gives you the security of knowing that at least a certain percentage of your repayments won’t change, but also gives you some additional flexibility to make extra repayments and benefit from any rate cuts.
Consider the total cost of the loan
The interest rate – whether fixed or variable – is obviously an important aspect of this equation, but don’t make the mistake of looking at it in isolation.
Ask for the Comparison Rate of any loan you’re considering, as this includes both the interest rate and most fees and charges payable during the life of the loan, making it a much more accurate comparison tool.
Consider the timing of costs
Different loans charge different fees at different times. So ask lenders plenty of questions to ensure you know exactly what would be owed and when. You don’t want to find yourself having to cover more fees in one hit, or quick succession, than you’re able.
Consider any packaged benefits
Some lenders offer valuable associated benefits for taking out a home loan with them. For example, at Beyond Bank we offer our free pinnacle +plus program to customers borrowing $200,000 or more, which entitles them to no transaction or loan establishment fees, discounts on other loans and bonus interest on term-deposit rates.
This is definitely worth factoring into your loan choice.
Finally, consider your lender
What’s important to you? Service levels? Institutional history? Community support and involvement? Look below the surface to find out what they’re really all about, and – so long as the above considerations add up as well – take your business to a lender you’ll be proud to be involved with.