How To Choose A Home Loan

Not all home loans are created equal. Choosing the one for you can feel tougher than picking your fave flavour of Arnott’s Shapes. But while the jury may forever be out on barbecue vs pizza, you don’t need to be so undecided on your home loan.

Here’s everything you need to consider when selecting a home loan that’s perfectly matched to you.

Remember, any advice provided on this website is of a general nature only and does not take into account your personal needs, objectives and financial circumstances. You should consider whether it is appropriate for your situation.

Interest rate

First up, you’ll be looking at lots of different interest rates. Different lenders offer different interest rates, at different times, and your rate dictates how much you’ll repay on the amount you want to borrow. Differences in rates don’t sound like much, but those little percentage points add up.

Let’s say you’re taking out a $500,000 mortgage and you’re deciding between lender A who’s offering a 3% rate, and lender B offering a 2.7% rate.

If that rate stayed the same for the 30 year loan term (which it almost certainly won’t, but we’ll come to that later), you’d pay over $28,000 more in interest with lender A. But keep your wits about you – rates aren’t the only thing that can make a major difference to your loan.

Rate type

The next thing to consider is how you’ll structure your interest rate.

Fixed rate

As wooden as your Dad on the dance floor, fixed rates are, well, fixed. They’re not budging for anyone. You and your lender agree on a rate that will stay the same for a set period of time (usually 1-5 years). You get certainty around your repayments and protection from unexpected interest rate rises, in exchange for missing out on potentially cheaper prices if rates fall later.

Pros

  • Certainty around repayments

  • Protect yourself from rising rates

  • Lock in low rates for longer

Cons

  • Often less features available (though with Up Home you get almost all the nice stuff)

  • Break costs apply if you want to change loans

  • You could get stuck on a rate that’s higher than newly advertised ones.

Variable rate

Variable rates, however, can move, groove, and party like it’s 1999. They’ll fluctuate based on a variety of factors, which means your repayments can fluctuate, too. If rates drop, you’ll nab some savings. But if rates rise, your repayments will increase too.

Plus, variable rates often come with extra features that you won’t get with a fixed rate – we’ll talk about these later.

Pros

  • If lender rates fall, so do yours

  • Typically more features available to you

  • No break costs

  • More freedom to move between lenders

Cons

  • Rates can rise without warning

  • Monthly outgoings can rise without warning

  • No certainty of how much you’ll repay each month

Split structure

Some lenders allow you to split your loan structure so that you can fix a portion of your loan at a set rate, and leave a portion with a variable rate.

Repayment type

Another consideration is the types of repayments you’ll make. You can either pay off principal and interest or interest only. (Up only offers principal and interest loans right now.)

Principal and interest

Principal and interest loans involve paying down the balance of your loan (which is called principal) as well as the interest that’s being charged on your remaining balance.

Interest only

Interest only loans mean you don’t pay down the actual balance of the loan. Instead, you simply pay off the interest on your balance.

Deciding which is right for you will depend on your goals, property strategy and your financial situation. For example, most people who get interest only loans are looking to invest; most people who want to live in their home get a principal and interest loan with the goal of owning their home eventually.

Speaking of features…

Alright, so what do we mean by features? Get your laughing gear around these juicy home loan add‑ons:

Offset account

The ultimate have-your-cake-and-eat-it feature is the humble offset account. An offset account essentially allows you to use your savings to reduce the amount of interest you pay on your loan.

Let’s say you’ve got that $500,000 loan we talked about earlier, but you’ve also got $30,000 worth of savings in your emergency fund. You could pay that off your mortgage, but what if you need it?

Enter: the offset account. It’s an account linked to your home loan, where you can keep your savings and access them whenever you want, but pay interest as though you’ve paid that $30,000 off the balance of the loan.

(Yee-flippin-haw, right? That’s why we went ahead and just made all the Savers on your Up or 2Up (whichever you use for your loan), as well as your spending account, free offsets. Up’s not here to put shoes on centipedes).

Redraw

The rock ‘n’ roll cousin of the offset account is a redraw facility. In a similar way, redraw lets you pay extra off your mortgage, but ‘redraw’ some of it if you want to. This means you can reduce interest without bidding a painful and permanent goodbye to your savings. Win!

Fees

Unfortunately, features don’t often come without fees. (Unless you’re us. But that’s enough sales talk, we’ll shoosh).

Some basic home loans will have no annual fees and a very no-frills experience. Others can carry annual fees of upward of $400, so it’s important to balance out whether you’re getting the benefits of the features being offered.

As an example, a home loan package could have an annual fee of $400, and come with a transaction account, a no annual fee credit card, and an offset account. Calculate how much interest you’re saving by using that offset account, and whether you really want or need the additional accounts and features. If you’re paying $400 and only saving $200 in interest, it could be costing you more than makes sense.

Look, it’s a lot

Choosing a home loan can be complicated. We’re here for any questions you have about home loans and Up Home – and it’s never a bad idea to chat to other brokers and home loan folk at different lenders too. There’s no one size fits all loan, so take this fresh knowledge and go add a splash of advice on your personal situation!

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