Home loans

Have you found your dream home, and now need a home loan to pay for it? Or perhaps you’re checking out what loans are available and what you can afford before you start to look for a property? Maybe you want to refinance your existing home with a better deal. Whatever stage you’re at, we have lots of loans from a large number of lenders for you to compare here at Finty.

By Yvonne Taylor   |   Updated 9th April 2020

Comparing home loans for $450,000.00 over 30 years.

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What is a home loan?

Also commonly known as a mortgage, a home loan is an amount of money borrowed from a bank or other financial institution for the purpose of buying an existing home, or renovating it, or building a new home, or refinancing an existing home loan. Where a property is being purchased, built or refinanced, the lender will usually take a charge over the property as security for the loan. This means that if you are not able to meet your loan repayment and end up in serious default, the lender has the option of repossessing the property and selling it to settle the debt.

How much can I borrow for a home loan?

It depends on a number of factors, including:

  • Your annual income, or the combined annual income of you and a joint borrower, such as your partner.
  • Your credit score or credit rating (an assessment of your creditworthiness based the borrowing and repayment history in your credit report — data collected by Australian credit bureaux).
  • The Loan to Value Ratio (LVR), which is the maximum percentage of your home’s value that the lender will allow you to borrow. For example, if you want to buy a property that the lender values at $800,000, they may agree to lend you 80% of the property value, i.e. $640,000. You will have to come up with the remaining 20% (which will be either $160,000 or the difference between $640,000 and the actual purchase price) as a deposit.

What is the normal repayment term for a home loan?

A typical repayment term would be 25 or 30 years.

How can I decide how long my home loan repayment term should be?

The lender may have a set repayment term, such as 25 years, or may offer a choice of repayment terms. The shorter the repayment term, the bigger your monthly repayments will be. As a general rule you should opt for the shortest repayment term you can afford, since this means that you will pay less interest in total over the life of the loan. But you should be realistic about what you can afford and give yourself some breathing space in case of tough times (such as temporary unemployment), especially if you have opted for a variable interest rate (because interest rates may increase).

What is the repayment frequency for a home loan?

Monthly repayments are the norm, but you can sometimes opt for more frequent or less frequent repayments.

What is included in the regular home loan repayment?

Most home loan repayments include a portion of the loan principal as well as interest charges. In the early years of a loan term, interest charges will account for the bulk of the repayment. But the ratio of principal to interest changes as the loan principal is gradually reduced, so that in the final years of the loan term, the regular repayments are mostly repayments of the loan principal.

Interest-only loans are an exception. In this case, the repayments only cover the interest charges and the loan principal does not reduce, either during the entire loan term or for an agreed number of interest-only years.

What kinds of interest rates apply to home loans?

Interest rates can be:

  • Fixed, which means that the interest rate will not change for an agreed period (e.g. five years).
  • Variable, which means that the rate may go up or down, usually in response to a change in the ‘cash rate’ (the market interest rate on overnight funds) set by the Reserve Bank of Australia.
  • Split, which means that different rates apply to different parts of the loan. For example, $300,000 of the loan principal could be subject to a fixed interest rate, while a variable interest rate could be applied to the remaining declining balance.

What should I take into account when deciding between a fixed interest rate and a variable or split interest rate?

A fixed interest rate loan charges interest at the same rate for an agreed number of years. It’s easier to budget for a fixed interest rate, because you know exactly how much your monthly repayments will be, and the amount will not change. If interest rates go up, your home loan interest rate will not. On the other hand, if interest rates go down, you will miss out on the benefit because your home loan rate will not go down.

Variable interest rates can go up or down, more or less in line with changes in the Reserve Bank’s official cash rate. Budgeting is more difficult, because there’s no certainty about the amount of your repayments.

A split, or partially-fixed interest rate could be the answer if you are having difficulty deciding between going for a fixed or a variable rate.

What is a comparison interest rate?

The advertised interest rate will usually include two numbers — the ‘interest rate’ and the ‘comparison interest rate’. The ‘interest rate’ is used to calculate the interest charges that will be applied to the amount of your loan principal. The ‘comparison interest rate’ has factored in the cost of all the lender’s fees, such as any application fee, loan establishment fee, monthly service fee and loan discharge fee, and expressed it in terms of what the interest rate would look like if these costs were included in it. It allows you to make a true comparison of the costs of competing loan offers.

Does a tiny difference in the interest rate have much effect on the amount I will have to repay?

Yes. Since the term of a home loan is so long (25 or 30 years) even a small difference in the interest rate can have a big impact on the amount you will repay. It may not look like a big difference when you compare your likely monthly repayments, but multiply that difference by 300 (25 x 12) or 360 (30 x 12) and you will understand the effect — a possible saving of thousands of dollars.

What is the best way to compare home loans?

Most people are looking for the lowest possible interest rate, but there are other factors to take into account. Depending on how cautious or risk-averse the lender is, and also depending on the borrower’s credit score and credit history, it may not always be possible to secure a loan at the lowest advertised interest rate. There may also need to be a trade-off between the interest rate and the amount able to be borrowed.

You also need to look beyond the primary advertised interest rate and check the comparison interest rate, to get a true loan cost including the lender’s fees and charges.

Loans may also have differing features, such as a redraw facility (the ability to withdraw some pf the repayments you have already made if you are ahead with your repayments), a mortgage offset account (a bank transaction account linked to your loan to offset against your loan balance, reducing the interest charges) and the ability to make extra repayments in order to reduce the interest charges and/or pay off the loan earlier.

A further factor to consider is the level of service you are going to get from the lender. Is the lender a household name? Do they make repayments easy, via online banking or a phone app? Do they have a reputation for good customer service, in case you need to query something or make an adjustment to your loan or repayments?

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