Features to look for in a home loan
With hundreds of home loans on offer, it’s hard to know which one has the features to suit your current situation, and hopefully save you some cash along the way. If you’re new to the market, or still scratching your head over commonly used terms and phrases, read on.
1. An Offset Account
What is an offset account? An offset account is what home lenders will refer to when they are describing a home loan which comes with an adjoining everyday account. It’s called an offset account because any funds you have in that account “offsets” the balance of your home loan and therefore charges you less interest.
Tip: An offset account is a great money saver – by making your everyday cash benefit your mortgage. Just remember to keep the balance as high as you can for as long as you can to reap the most reward.
For example, by having $5,000 in an offset account, you could save $10,893 and shave 18 months off the life of your home loan. This is based on having a $300,000 loan over 25 years and paying an average 4.70% interest rate.
2. Low Headline Rate
What is a headline rate? A headline rate simply refers to the advertised rate the lender is choosing to promote. This is accompanied by the comparison rate, which is a higher rate because it incorporates the fees and charges you’ll be charged with the loan. Advertising the comparison rate is a legal requirement of all home lenders.
Tip: By choosing a home loan with a low ongoing rate you’re saving from the get go. Do a little research to make sure the lender’s rates are consistent and therefore is unlikely to hike rates down the track. It may also be worthwhile looking at fixed rate loans.
3. Low Upfront Fees
What are they: Upfront fees are the fees your lender will charge you to take out a home loan e.g. an application fee. In today’s competitive home loan environment many lenders have been waiving their upfront fees to gain new business so look out for loans with low or no upfront fees.
Tip: An upfront fee can seem like a big investment but over the course of a long term loan, it isn’t a deal breaker – provided you’ve taken up other opportunities for a discount. The only time an upfront fee can be a dent in the pocket is if you choose to refinance in the next few years and are paying multiple upfront fees in a short space of time.
4. No Annual Fees
What are they: Annual fees are different from upfront fees as they’re charged each and every year you have the loan. These fees can vary from as little as $0 and be in excess of $450.
Put your haggle hat on and see if you can bargain with your lender by asking them to waive or lower the annual fee on your loan. If your lender won’t budge, look for a loan with one of the handful of lenders with no annual fees.
5. Repayment terms
What is it: Lenders will often outline the terms and timing of your payments and while it may not seem realistic, there will be times when you want to make additional payments or pay fortnightly to get yourself ahead on your mortgage, so it’s worthwhile checking that you won’t be penalized for this.
Tip: By paying your mortgage weekly or fortnightly rather than monthly it reduces the amount of interest you accrue on your mortgage balance. This can lead to a saving of $4,000 over the course of a 30 year loan.
All rates and calculations are current as at 14/7/15
About the author: Steve is Mozo’s resident Home Loan negotiator, helping Aussie home buyers secure the best possible rate possible from a broad range of home lenders. Steve is also an avid property investor in his own right and has been investing in the Sydney property market for over 20 years. Along with an extensive knowledge of home loan products and property trends, Steve is full of practical tips to help first home buyers, refinancers or investors build and get the most out of their property portfolio.