What to look for when taking out a mortgage
When I think about home loans, the first thing that springs to mind is, What is the interest rate?
Finding the lowest rate available is drummed into us all the time. And this is undoubtedly one of the biggest considerations when taking out a mortgage. But there’s more to think about when choosing a loan to be sure it’s right for you.
Home loan repayments
With most home loans, your monthly repayments cover the principal, or the amount you borrow, plus the interest. This means you’re paying off both.
There are, however, options that allow you to pay off just the interest for a nominated period of time. Your repayments will be lower, but the interest rate may be higher.
If you choose to take this option, work out whether you can afford the repayments once the loan reverts to principal and interest.
And remember, if your property loses value during the interest-only period, you may end up owing more than your home is worth.
The term of home loans
Mortgages can be taken over a period of time that suits you best. The most common loan duration is 25 or 30 years.
Choosing a shorter term home loan, such as 15 or 20 years, means your repayments will be higher each week or month. But you will pay off your loan quicker, as long as you keep up with payments.
Longer term home terms will reduce your minimum payments, but add years to your loan and increase the amount of interest you’ll pay.
Think about how many working years you have ahead. Do you have a secure income or if it fluctuates? And what are your other outgoings? Then nominate the shortest term you can manage.
Fixed vs variable home loans
As a bit of a nervous Nelly, I prefer the idea of a fixed interest rate. Then I know how much I have to pay every month for the next few years. However the interest rate will often be a bit higher than a variable rate might be.
A fixed rate can buffer you from interest rate rises. However it means repayments will stay the same even if there’s an interest rate drop. If this happens, those on a variable rate will pay less.
It can also cost more if you need to break a fixed rate loan, and there may be fewer features, such as off-set accounts.
If you’re not sure, you can always go for a split loan where part is fixed and part is variable.
Home loan bonuses
To attract new customers, banks and other lenders sometimes offer a low introductory interest rate, waive application fees or offer cashback rewards.
Bonuses are nice but, if you’re planning on having your home loan for many years, make sure it suits your needs. Don’t be tempted just by the up-front bonuses, if you’ll be disadvantaged down the road.
Alternatively, you can always move your loan to another institution. So be prepared to look for better deals elsewhere once those short-term bonuses have run their course.
Find more info
There’s lots of useful information and a handy home loan calculator on moneysmart.gov.au
