The best way to know that you’re getting a good deal on your current home loan is by educating yourself and making a mortgage comparison.
The right home isn’t complete without the right mortgage, so it’s essential that your loan is compatible.
To make the comparing process easier, we’ve created a key fact sheet that includes interest rates, repayment types, loan features, and more.
Key Fact 1: Interest Rate
All loans will use the following interest rate options regardless of lender:
- Variable: Interest rates will vary depending on the official cash rate
- Fixed: Interest rates will remain unchanged for a set period.
Fixed loans are typically the better option because the debtor’s monthly payments don’t change.
Key Fact 2: Repayment
Our second stop on the home loan comparison journey is repayment type. On most Australian loan products, you can choose between principal-and-interest or interest-only loans.
- Principal-And-Interest: Debtor makes regular payments towards a 25-30 year principal.
- Interest-Only: Debtor only needs to make monthly interest payments each month, but the loan’s principal won’t diminish unless they pay extra on top of the loan.
Principal-and-interest loans are preferred because they cover all of your bases.
Key Fact 3: Loan Features
Most loans come with plenty of features that make paying them off more fun.
However, most loan features come with extra premiums, product fees, or interest rates, so choose carefully.
- Portability: This allows the debtor the option to transfer their existing loan from one property to another. Lenders may push this option to keep customers loyal to their company. Portability gives you access to all the features available on the previous loan, but you’ll often be locked into a variable rate. Ask your lender if they allow fixed-rate portability.
- Redraw Facility: The redraw facility feature gives customers access to a portion of their loan as long as they pay an extra up-front fee. Redraw also gives you the benefit of a reduced interest rate, but many lenders will apply extra charges to “redrawed” cash.
- Repayment Holiday: Some home loans will provide this period for a few months. Customers can use this feature to use mortgage equity towards a vacation.
- Split Rate: A loan type that splits interest rates between variable and fixed.
- Offset Account: A savings account that’s linked to your home loan that reduces the overall amount you owe. The additional costs of an offset account may outweigh the benefits, so check the account’s terms before you apply for easy repayments.
Avoid offset accounts and split rates because you typically pay higher fees for these privileges.
I would even pass up on repayment holiday if you have a decent enough cash flow.
Portability and redraw facility offers the most benefits to the customer, so opt for them over others.
Key Fact 4: Loan Type
Finally, we come to the loan type. Home loans typically come in 6 loan types:
- Basic: Few features, low-interest rates, and an average amount of restrictions.
- Standard: Offers more flexibility over basic because you can add on loan features or switch to a different interest rate when you want. It often comes with an offset account.
- Loan Package: A bundle deal that includes a standard loan, a lower interest rate than what’s offered through a standard loan by itself, and a free transaction account.
- Line of Credit: Since lines of credit only let you spend up to a certain amount, it functions similarly to a credit card. The credit is fixed and doesn’t reduce, but you can continuously draw from that limit. However, you’ll eventually need to pay it off in full.
- Bridging: Mangest the tradition between buying and selling properties.
- Construction: Covers the cost of building a new house.
The type of loan you get is determined based on your needs, but a loan package offers the most bang for your buck.
If you’re switching mortgages or building a home, you’re free to add bridging loans and construction loans to your loan package product, usually without fees.