5 Key Factors to Consider When Choosing a Home Loan

What to look for when considering your mortgage options.

So, you’re ready to look at applying for a home loan to get you into your dream home - what do you need to look for? First of all, having a mortgage broker is a key component of this process to make sure you get the best product to suit your requirements, and have someone on your side guiding you through the process.

There are many reasons why having a mortgage broker is advisable when trying to apply for a mortgage, you can see the full list here.

Once you have a mortgage broker, there are several indicative factors to consider and your broker will provide general advice on each of them 

1. Interest Rates

An interest rate can be summed up as the cost of borrowing money. When a bank or lender grants you a home loan, they make money off that transaction by the interest you pay; and this amount is dictated by the interest rates.

Interest rates can significantly impact your repayments and if you have a variable loan, the repayment value will fluctuate upwards or downwards many times over its lifetime. A fixed home loan will see your repayments stay the same for the period you agree to. You can read more about the different kinds of home loans here.

It is very important to take into account the comparison rate as well, which takes into account all fees and charges over the life of the loan and not just the rate. Your mortgage broker will compare interest rates between multiple lenders to find the right one for your budget.

2. Loan Term

Your loan term refers to the length of the loan from when the loan settles to the end of the agreed contracted period where you will have paid the loan down to a zero balance at that time.. 

You may think that a long-term loan is best because it gives you time and removes pressure from the repayments, but ultimately this may result in a much higher amount of interest paid. A short-term loan however will offer higher repayments, so there needs to be some thought and planning about what you can afford to repay now and in the future.

3. Mortgage fees and charges

One of the most common frustrations with new home buyers who are obtaining a loan for the first time is the hidden mortgage fees and ongoing charges.

Outside of a deposit, there is a list of costs you need to be aware of before committing to a loan product to ensure you can afford to progress comfortably, 

Upfront Fees

• Application or establishment fee

• Property valuation fee (read more here)

• Lenders Mortgage Insurance (read more here)

• Conveyancing and legal fees

• Mortgage registration fee

Ongoing Fees

• Annual fee (some lenders may charge this for maintaining the loan)

• Late payment fees

• Loan service fee 

Exit Fees

• Discharge fee (this may be charged if you refinance, situations vary)

• Early exit fee

• Settlement fee

Other costs

• Stamp duty

• Home insurance

• Building inspections

• Pest inspections

• Government charges

4. Repayment Options

All lenders have varying terms and conditions when it comes to the functionality of how you interact with your loan. Ideally, your lender will offer redraw facilities, flexible repayments and the option to make extra payments.

Redraw Facilities

If you have the option to make additional repayments on your mortgage, this reduces the outstanding balance and the interest owed over time.

A redraw facility means that you have the option of withdrawing those extra funds you have paid should you need them without any penalties.

Flexible Repayments

This feature allows you to rearrange your repayment schedule if you need to, take a period off from repaying your mortgage when life changes may mean you need extra money in the bank for important situations and also allows you to make extra payments if you can. All of the features should be offered without penalty to you.

5. Loan Features

Offset accounts | A desirable feature to look for when choosing your lender is the option of an offset account. This is where you can house your savings against your loan to offset some of the interest you owe. 

Some lenders will offer multiple offset accounts, making it much easier for you to have transparency around what you are saving for and how much you have.

Split-rate loans | If you would like to benefit from the advantages of both a variable rate and a fixed rate, some lenders will offer split-rate loans. This means you can apply a fixed rate to part of the loan, and a variable rate to the remainder. 

Interest-only periods | These are very helpful if you are trying to manage your cash-flow or for tax purposes. It allows you to pay off only the interest of your loan for a set period rather than principal and interest combined.

To find out more about what you should be considering before committing to a home loan product, speak to the experts at Allen Finance.