Smart Guide to Comparing Your Home Loan

Shopping for a home loan can feel overwhelming. With so many lenders and different rates to choose from, how can you be sure you’re getting the best deal? Understanding how to compare rates is crucial, even a small difference of just 0.5% in your interest rate could save (or cost) your thousands of dollars over the life of your loan.

In this guide, we’ll walk you through how to compare home loan rates, so you can make the decision that is best for you.

Understanding Your Home Loan Needs:

Before you even start down the home loan path, you’ll need to know what your goals are. Everyone’s situation is different, and because of this, the best loan for your mate or neighbour might not meet your goals. By asking yourself a few questions, you’ll start to understand what matters to you. Some questions you might want to ask are:

• Am I looking for the lowest possible repayments right now?
• Do I want flexibility to make extra payments when I can?
• Am I planning to live in this home for many years, or sell it soon?

Answering these questions will help guide you toward the right type of loan. For example, if you’re on a tight budget, finding the lowest interest rate might be your priority. If you are expecting your income to increase, then maybe you want a loan that allows for extra repayments without penalties.

Factors to Consider When Comparing Home Loans:

When looking to compare your home loan interest rates there are a few factors to consider beyond just your rate. They are:

• Fees and Charges: Home loans can come with various fees such as application fees, ongoing account keeping fees, and discharge fees. This can add to your costs
• Loan Features: Home loans can offer features like offset accounts to reduce interest with your savings, redraw facilities to access extra repayments, and the ability to make additional repayments without penalty
• Loan Term: Most home loans run for 25 to 30 years, but you can choose a shorter or longer term. Shorter terms mean higher monthly repayments but less interest overall, while longer terms lower your repayments but increase total interest paid

Understanding Different Interest Rate Types:

A big decision you’ll make about your home loan is the type of interest rate you want. The options you will have are fixed interest rates, variable interest rates, or a combination of the two using a split loan. Below we break down what each means, while providing the pros and cons to help you choose the one that fits your needs the best.

Variable Interest Rates: Changes at any time, usually in response to changes in the Reserve Bank of Australia (RBA) cash rate or other market conditions.

Pros of Variable Rates:

• Offers more flexibility, including unlimited extra repayments
• Access to features like offset accounts and redraw facilities
• Benefits when interest rates fall
• Usually, no penalties for paying off your loan early

Cons of Variable Rates:

• Repayments can increase if interest rates rise
• Harder to budget when payments might change
• Financial stress if rates rise significantly

Variable interest rates suit customers who are looking for flexibility and can handle potentially payment increases. It is also good for customers who might want to pay off their loan faster, through extra repayments.

Fixed Interest Rates:

A fixed interest rate stays the same for a set period, normally between one and five years. After that period ends, your loan typically converts to a variable rate unless you stay with a fixed interest rate again.

Pros of Fixed Rates:

• Repayments stay the same during the fixed period, making budgeting easier
• Protection from interest rate rises
• Peach of mind knowing exactly what you’ll pay each month

Cons of Fixed Rates:

• If interest rates fall, you won’t benefit
• Less flexibility meaning extra repayment may be limited or come with fees
• Breaking a fixed loan early (selling your house or refinancing) can come with significant costs

Fixed interest rates suit customers who need stable repayments, such as first-time buyers on tight budgets or families living on a single income.

Split Loans: Helps you divide your home loan into parts with one part being a fixed interest rate and the other being a variable interest rate. You can decide what percentage goes into each part.

Pros of Split Loans:

• Provides balance of certainty and flexibility
• Partial protection against rate rises
• Ability to make extra repayments on the variable side

Cons of Split Loans:

• Difficult to manage
• Less protection than a fully fixed rates if interest rates rise
• Less flexibility than a full variable interest rate

Split loans are ideal for customers who want some certainty but also some flexibility. Split loans will provide a middle ground that are helpful to customers, especially in times of uncertain interest rate movements.

For more information, Moneysmart offers a helpful article, ‘Choosing a Home Loan,’ which covers key factors to consider when selecting a loan.

5 Steps to Comparing Your Home Loan Effectively:

Now that you understand what to look for and the different types of interest rates, it’s important to know how to compare your home loan:

1. Check Your Financial Position: Know how much you can borrow and what you can afford each month. You can use our borrowing power calculator to help you estimate your borrowing power and potential repayments
2. Seek a Guide: We’re here to guide you every step of the way, helping you secure the best home loan to match your financial needs
3. Lender Variety: With access to 50+ lenders, we do the heavy lifting offering you a range of options to find the best deal for your needs
4. Review and Ask: Once you’ve narrowed down your options. Don’t hesitate to ask us any questions
5. Negotiation: Your dedicated Home Lending Specialist will negotiate on your behalf with lenders to make sure you’re getting the best deal

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Ready to find your next home? Our comprehensive guide “New Home, New Beginning: Guide to Your Next Home” breaks down everything you need to know you make your move with confidence.