When you’re looking for a home loan, it’s tempting to simply go for the loan with the lowest interest rate. But while a great rate is important, it’s not the only factor to consider.
Here are five questions to ask before you sign on the dotted line.
Fixed or variable?
With interest rates at or near historical lows, locking in a rate for years to come may look very attractive. Many lenders let you fix your rate from one to five years, although some offer fixed rates for 15 years or more.
A fixed rate also makes budgeting easier, since you know exactly how much you’ll need to pay each month for years ahead. But if you want to pay down your mortgage quickly, a fixed rate can become a liability, as generally, you can’t make extra payments on it, or benefit from drops in interest rates.
Another option is to fix only part of your loan, so you get the best of both worlds.
Would you like some special features with that?
Used well, these two handy loan features can potentially take years off your loan:
- An offset account is a transaction account linked to your home loan. Your lender offsets money in the account against the balance of your loan, reducing your interest bill while allowing you to access you cash instantly.
- A redraw facility lets you make extra payments now, then withdraw the extra amounts later if you need to.
Have you counted all the fees and costs?
The headline interest rate doesn’t always capture all of the costs of a loan. Don’t forget to consider other fees and costs – from one-off establishment or set up fees, to ongoing service or administration fees, or a break fee if you pay off your loan early.
How much do you need for the deposit?
The days of zero deposit home loans are largely over – most lenders want a deposit of at least 20% of a home’s value. If you don’t have that much saved, you may still be able to find a lender to help you, but they’ll probably ask you to take out mortgage insurance. This covers your lender if you default on your loan, so it’s protection for them, not for you. And it can add thousands of dollars to the upfront cost of your home loan.
Can you afford it if rates change?
The fact that rates are currently at record lows suggests there’s plenty of potential for them to rise over the life of a loan, so be prepared.
One smart move is to take out income protection or trauma insurance cover, so you can keep up with your repayments if the unexpected happens.
Find out more
There’s more to choosing a home loan than just finding the lowest rate. Please contact us so we can help you make the best decision for you and your family.