It’s a promising time to be a homeowner, with Australia’s housing market showing positive signs of growth as record low mortgage rates and high national auction clearance rates make buying now extremely favourable on the surface.
Despite such an encouraging market, concerning statistics highlighted that 57% of mortgage holders don’t know the current interest rate they’re paying on their home loan.
In addition, 54% admitted to not understanding split interest rates, 26% either said they had very little, or no understanding of variable interest rates, and one in five said they didn’t really understand how variable interest rates worked.
With that in mind, Compare the Market banking expert Rod Attrill provided homeowners, both experienced and new, some tips on how to best decipher the home loan process and how to best utilise growth figures in the housing market to their advantage.
Work out the length of your loan
With the average mortgage size for first home buyers exceeding $342,800 in 2018, it’s important to accurately map out an achievable timeframe and forecast manageable repayments with your lender. Discuss the advantages of breaking down your home loan into weekly, fortnightly, or monthly repayments and how much interest you’ll be paying over the life of your loan. Paying fortnightly would allow homeowners to make an extra month’s repayment per year. For example, if you made repayments of $1,000 every fortnight of the year, you would pay back $26,000 in one year. If you made repayments of $2,000 every month of the year, then you would only pay back $24,000 in one year. That’s $2,000 more you’ve paid off your home loan each year.
Compare key facts sheets
A great way to compare home loans is to ask for a key facts sheet from different lenders. The key facts sheet will give you the information you need, so you can directly compare features, interest rates and fees. This will outline the total amount to be paid back over the life of the loan, repayment amounts, fees and charges. These fact sheets also provide a personalised comparison rate to help you compare the total cost of a loan against other loans. Lenders are obliged to provide a key facts sheet for your home loan if you ask for one, unless you’re considering an interest-only or line of credit home loan.
Consider an offset account
A home loan feature that could be worth considering is an offset account, which could save you money by limiting the interest you pay on your home loan. If you choose to link your eligible home loan account to your savings account, the balance of the savings account will be seen (but not drawn upon) as money you’ve paid towards your home loan. Consequently, you will only be charged interest on the “remaining” balance of your loan. For example, if you had a $300,000 home loan and $25,000 sitting in your savings account, you will only be charged interest against $275,000.
Get your head around the different loan types and rates available
Choosing a home loan should be based on your personal circumstances and financial goals. When approaching your broker or lender, discuss the different types of loans, features and rates that are available for your home loan and that each one involves. Ask for clarity around how a rate decrease or rise could impact you and how you can track these changes month on month. Some of the rates you will come across include:
- Variable: A variable rate is the most common type of loan. This interest rate can fluctuate over time, with increases or decreases set by your bank or financial institution. Lenders often look at cash rate changes by the Reserve Bank of Australia to determine if they will shift loan variable rates. It’s especially important to monitor variable rate changes to check for any adjustments to your repayments on your home loan.
- Fixed: The interest rate on your loan will remain unchanged for the fixed period, typically between 1 – 5 years which provides you with some certainty for your repayments during that period. Typically your loan will revert back to the variable rate after the fixed rate period. Keep in mind that penalties may apply if you break a fixed rate.
- Split rate: A split rate is where part of the loan is variable and part is fixed. You can enjoy the benefits of both fixed and variable rate options.
- Interest only: Instead of paying off both the principal and interest in your repayments, you will only pay off the interest on your loan for a certain period of time (approx. 1 – 5 years). Inevitably, your repayments will be lower for the interest only period of time, than if you were paying off the principal too. However, during the interest only period the principal amount (the amount you initially borrowed) will not reduce unless you choose to make additional repayments. It is important to understand that while paying interest only may be a cheaper alternative and more budget friendly, in the short term, you may pay more interest overall as the balance is not reducing and your repayments are likely to be higher at the end of the interest only term.
Introductory rates and comparison rates
Introductory rates can draw a lot of people in however, it’s important to understand how long the “honeymoon period” will last and what your interest rate will be once your loan reverts to a standard rate. A comparison rate will help you compare multiple lenders’ home loans side by side, using a single interest rate. This interest rate includes any fees that might apply to that loan including application fees and any ongoing fees that might apply to give you a true picture of just how much the loan will cost you. Lenders should also supply you with a copy of a comparison rate schedule, which will have this comparison rate included.
“Buying a property is an exciting time and it can easily become overwhelming,” Attrill said.
“It’s a good idea to cover the basics and familiarise yourself with different loan types, and how changes in interest rates can affect how much you need to repay for the lifetime of your loan.”