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Our top home loan tips

17 December 2015

Our top home loan tips

The first signs of spring are in the air. It’s a time of new beginnings and fresh starts.

It’s also a time when many people begin the hunt for a home.

So to help you be prepared for when you find the one, over the next few weeks we’ll be posting the Great southern bank team’s top home loan tips.

Here’s the first few – stay tuned for more:

We hope you find the checklist helpful, happy house hunting!

Home loan tip #1: Check out the comparison rate Show more

When comparing home loans, always look at the comparison rate.

While one home loan may have a lower interest rate than another, it may have fees and charges that actually make it more expensive.

The comparison rate can help you to compare the overall cost of each loan.

It takes into account upfront and ongoing costs, such as establishment and monthly account keeping fees, as well as the interest rate. It then represents these as a single percentage figure based on a defined loan term and loan amount.

While they’re a useful guide, there are some points you need to keep in mind about comparison rates:

  • In Australia, comparison rates are always calculated on a standard loan amount of $150,000 and a loan term of 25 years. This may be different to the loan amount and term that you have in mind.
  • Some home loans also come with a minimum amount you can borrow (for example $500,000). And so even though the comparison rate is calculated on a loan of $150,000, you might not be able to borrow that amount in reality.
  • And home loans can also offer additional benefits, like the ability to make extra repayments, that aren’t included in comparison rate calculations. Some fees may also be excluded from the comparison rate, such as redraw or early payment fees.

So while comparison rates are a handy ‘apples with apples’ comparison tool, they aren’t a substitute for considering whether the home loan meets your personal needs.

One of the biggest decisions you’ll make about your home loan is choosing between a fixed and a variable interest rate. Here are some things to consider to help you decide what’s right for you.

Fixed interest rate

Fixed rate home loans give you certainty, and help make budgeting easier.

By fixing your interest rate, you know exactly what your repayments are for a set amount of time.

A fixed interest rate also protects you against interest rate rises. Even if the Reserve Bank of Australia’s (RBA’s) official cash rate rises, your interest rate stays the same – and that means your repayments will stay the same too. Of course the flipside is that if interest rates fall you’ll miss out on the savings.

There are some other points to think about too.

Often a fixed interest rate is higher than a variable interest rate because you’re paying a premium to ‘lock-in’ your interest rate, so your rate won’t move for that set amount of time.

With most fixed rate home loans you won’t be able to make extra loan repayments or there may be a limit to the extra repayments you can make. Usually, there is no offset account feature on a fixed rate home loan either.

Some lenders do offer fixed rate home loans that allow extra repayments and offset accounts. These are usually slightly more expensive (i.e. have a higher interest rate) because of the flexible features on offer.

With fixed rate home loans you may also have to pay a break fee if you decide to change or pay off your loan within the set time period. So if you sell your house or want to move your home loan to another financial institution you may be required to pay a break fee.

Variable interest rate

Variable rate home loans tend to give you more flexibility, but leave you open to changes in interest rates – both up and down.

Variable rates tend to follow the RBA’s official cash rate. The upside is that if the official cash rate falls then it’s likely your variable rate will fall too, and so your home loan repayments will decrease. The downside – if the official cash rate rises then so too will your home loan repayments.

Variable rates are often lower than fixed rates (though this is not always the case). And with a variable rate home loan you can usually access more features – like offset accounts, the ability to make extra repayments at no cost, and the flexibility to pay off or move your home loan without penalty or break fees.

However, while variable rate home loans do not have any break fees or penalty fees, they may still have security or discharge fees associated with them.

Splitting your loan

If you can’t decide, there is another option – you can split your loan so that part of it is a fixed rate and part of it is a variable rate. This allows you to manage some of the risk of an interest rate rise with the fixed rate loan, while still having the flexibility with the variable rate loan so you can make extra repayments or pay the loan off early.

We know there’s a lot to think about when it comes to interest rates. There are pros and cons for each, so it really comes down to choosing the one that best suits you.

If you’re looking for a house to buy you’ve probably already made your ‘home wish list’. You’ve picked your favourite suburbs, chosen the ideal number of bedrooms, and decided on newly-built versus a ‘renovator’s delight’.

Just as important (though perhaps less fun) is creating your home loan wish list.

There are many features that can give you flexibility, save you money and even help you pay off your home sooner. So when you’re comparing home loans, it’s worth looking at what each offers in terms of extra features and what will suit your needs.

We’ve compiled a quick glossary of features to help you get started.

Extra features can often come at a cost, so it’s important to check the terms and conditions, fees and charges that apply to each home loan.

Extra repayments: This allows you to pay more than the minimum required repayments on your loan. So if your standard monthly repayment is $2300, you may decide to pay $2500 per month instead. This means you can pay off the loan more quickly, and reduce the amount of interest you pay. You may also be able to make lump sum repayments in addition to your standard repayments. If you receive an unexpected sum of money, like a bonus or an inheritance, then you can put that towards your loan.

Offset account: This is where you use the money in linked savings and transaction accounts to ‘offset’ your home loan. This means the balance in your linked accounts is taken off the amount you owe on your home loan, reducing the amount of interest you pay. So if you have a loan of $500,000 and a balance of $10,000 in your offset account/s, you’ll only pay interest on $490,000 instead of $500,000.

Offset accounts can have different features. 100% offset means you can deduct the full balance of your linked account from your home loan. Some home loans have a limited offset (where you can’t deduct the full balance). In some cases, a minimum balance requirement may also apply. There are now also loans available with multi-account offset so you can link a number of savings and/or transaction accounts to your loan.

Redraw: This feature provides access to the extra repayments you have made on your loan. You can take out (redraw) money from your ‘repayments in advance’ or ‘redraw balance’, which is handy if you decide you’d like to use that money for something else – like a holiday.

Loan top-up: With a loan top-up you can increase your existing home loan and use the equity in your property for other things - like a renovation, or as a deposit for buying an investment property.

Package home loans: Your home loan is provided as a ‘package’ that might include benefits or discounts on a range of products like credits cards and insurance. You may pay an annual fee to benefit from better rates and lower fees across the range of products.

Buying a house is one of life’s greatest joys. Saving for a deposit – well, it’s less enjoyable.

So how much will you need for a deposit? And what are some of the other financial considerations you need to think about when you’re getting ready to buy a home? Here are a few pointers.

The minimum deposit you’ll need generally depends on the type of loan and the financial institution. As a guide you should try to save about 20% of the value of the property you’d like to buy, plus a little bit extra to cover some other upfront costs (like stamp duty and legal fees).

Almost all financial institutions accept less than a 20% deposit, but they require Lenders Mortgage Insurance (LMI) to cover themselves for the higher risk. LMI is taken out to protect the lender in case you default. This is a one-off cost the borrower pays, and is generally added to the total value of the loan.

Another consideration when saving for a deposit is the Loan to Value Ratio (LVR). The LVR is the loan amount as a percentage of the value of the property. For example, if you want to buy a property valued at $500,000 and borrow $450,000, that’s an LVR of 90%. Almost all home loans have a maximum LVR, so if you want to borrow more than the maximum LVR then you won’t be eligible for that home loan.

While most lenders will allow you to borrow up to 95% of the value of the property (a 95% LVR), there are some niche lenders that will lend up to 100%. However, you may be charged a higher rate of interest and fees on these types of loans.

There’s also some other upfront costs you’ll need to budget for too. These include:

  • stamp duty
  • legal fees
  • application fees
  • valuations
  • building and pest inspections.

What it all boils down to is the more you save, the better. The bigger your deposit, the less you need to borrow - and the less interest you’ll pay in the long run.

And remember your deposit is just the start. You also need to be able to comfortably afford your repayments too.

When you’re working out how much you can afford in repayments each month, it’s a good idea to add in a bit extra so you’ve got some breathing space if interest rates rise. You may also want to consider whether a fixed or variable rate will be better suited to your financial situation (see tip #2).

Most importantly you need to leave enough left over in your budget to live. Sure, you’ll need to make some sacrifices, but you still want to be able to enjoy life. After all, that’s what it’s all about.

So you’ve decided on fixed versus variable, created your home loan wish list and have finally reached your deposit goal.

The next step is to pull together the paperwork you need to apply for your home loan.

The specific documentation you’ll need varies between financial institutions, the loan purpose (such as refinance or construction) and whether you’re a new customer.

But it’s nice to be prepared, so we’ve pulled together a quick checklist of the types of documents you might need to dig out of the files.

Proof of identification

If you’re new to the financial institution you’ll have to provide identification. This generally includes:

  • with a photograph e.g. passport, drivers licence, proof of age card, birth certificate, citizenship certificate
  • without a photograph e.g. Birth certificate, Medicare card, credit card, debit card, health care card

Proof of income

  • Pay slips or account statements showing your salary (generally your last two salary payments)
  • Your most recent payment summary (Group Certificate) or ATO Notice of Assessment
  • Rental agreement (if relevant)
  • Shareholding statements (if relevant)
  • Centrelink statements (if relevant)

If you’re self employed:

  • Copies of your personal income and business tax returns
  • Financial statements
  • Recent ATO Notice of Assessment

Details of savings and assets

Past account statements to demonstrate genuine savingsAnd if relevant:

  • Term deposit account details
  • Share investment statement
  • Property or motor vehicle documentation

Details of other loans and expenses (that are with a different financial institution)

  • Existing loan statements
  • Credit card and store card statements
  • Utility bills

Loan purpose

  • Contract of Sale
  • Copy of Transfer of Land

If you’re building:

  • Building contract
  • Building plans

If you’re refinancing:

  • Loan statements (usually the last six months)

Other

  • Insurance documents (e.g. Home and contents, loan protection or life insurance)

Please note: This is only intended as a general guide in relation to issues you may want to consider when obtaining a home loan. It is not intended to be an exhaustive list of all relevant issues and you should take into account your own particular circumstances, and obtain independent expert advice where needed, before proceeding.

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