If you’re considering taking out a home loan, it’s easily the biggest financial transaction you’ll make in your life. So it’s vitally important to make sure you’re choosing the home loan that’s right for your circumstances.
Ask yourself these four questions when choosing a home loan and you’ll be on your way getting yourself the best possible deal.
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1) What sort of interest rates should I choose?
Fixed versus variable – such a conundrum! Fixed are certain; you’ll know exactly what you’re paying each month and you won’t be subject to surprise interest rate fluctuations. On the other hand, variable home loan rates are usually a few percentage points lower than fixed rates – saving you money.
The risk with fixed rates is the long term lock-in commitment. If variable rates downturn, you are stuck with higher repayments. The risk with variable rates is the potential for interest rate rises to increase your monthly repayments beyond what you can afford.
Compare both fixed and variable interest rates your home loan provider is offering you, and consider your capacity to pay both. Can you afford the risk and longer term commitment of paying fixed rate for three or five years? And can you withstand a potential interest rate rise of a few percentage points? Another option is a mix of both variable and fixed, which many lenders now offer.
2) What fees and costs will be included?
Banks and other home loan providers are very competitive, offering all sorts of features to get your signature. But beware: extra features mean extra costs. It’s important to asses each feature and determine whether you’ll use it. For example you might plan to move up the property ladder in five years, so the chance to transfer your loan to the next property (portability) may be appealing.
When it comes to fees, there can be plenty of hidden fees, like application fees or redraw fees that negate the benefits of a lower interest rate. It can be hard to compare like for like with lenders providing a combination of fees, but taking the time to compare the total costs can save you thousands down the track.
3) Should I use a mortgage broker?
Why do the work yourself? If you engage a mortgage broker, they can do the comparisons for you, finding the best deal and helping you submit the application. But, mortgage brokers are paid on commissions from lenders, so you can never be truly sure their recommendations are based on what’s best for you. Mortgage brokers don’t have relationships with all lenders, so the deals they’re offering you may not reflect what the broader market has to offer.
However, with tight regulations on mortgage brokers in Australia to ensure their professionalism, you can be confident that most brokers offer a genuinely valuable service.
Ask your potential mortgage broker these questions:
- How many providers do you work with? Is it a range of bank and non-bank lenders?
- Are you a member of the Mortgage & Finance Association of Australia and/or the Finance Brokers Association of Australia?
- What commission will you receive? (Legally they are required to disclose this.)
- How do you feel interest rates will fluctuate in the short and long term and how will this potentially affect me?
- How do I know you are looking after my best interests?
Putting your mortgage broker through his or her paces will give you peace of mind that you’ve selected the right person to help guide you through the process
4) How will my circumstances change?
Get your crystal ball and start gazing! It is very difficult to predict the future, but you need to consider all eventualities. If you start a family, could you make repayments while on parental leave? What about if you lost your job? Is the value of the property likely to increase or stagnate? Some scenarios may seem unlikely now, but it’s important to have built in contingency in your home loan so that you can maintain the debt even if your financial circumstances change.