Choosing The Right Loan

After making the big decision to buy, the next question is "Where do I start?" The process of choosing a loan and a lender can be quite complicated but if you tackle it in stages you can avoid disappointment, frustration and wasted time.

There is no substitute for doing your homework. A good place to start your search is with a list of home loan lenders. Many lenders are online and have their own web sites and freecall telephone lines. There are also other web sites which are independent and will help you choose the loan that suits your requirements.

In choosing a loan that's right for you you should consider:

  • Your needs,
  • The associated costs, and
  • The loan features.

Your needs

What you want the loan to do is the most important consideration. Do you want to make the minimum payments only? Do you want to be able to make extra payments? Do you want to be able to extend the loan later when your family grows or you need finance for special purchases such as a car? Do you want a credit card attached to the loan? These are some of the things you must think of before you start asking questions of different lenders.

What is the loan for?

If you are going to live in the property you need a home loan. If you are borrowing to purchase an investment property you need a residential investment loan. Some lenders offer separate products such as interest only repayments for investors but increasingly the products are losing their differentiation. Investing in real estate is discussed in Investing.

How long do I want the loan for?

If you can afford to pay more than the minimum monthly repayments you can save a considerable amount of interest. The faster you can repay the less interest you will pay. However if you are too ambitious and choose a loan period that is too short you may get into trouble if you have an unforeseen expense or suffer a loss of income. To avoid this, consider choosing a loan that lets you make additional repayments which has the effect of reducing the period of the loan and the amount of interest paid.

Should I choose a fixed or variable rate?

This calls for a certain amount of ‘crystal ball gazing’! Even the most experienced financiers and professionals have trouble predicting home loan interest rate trends and may get it wrong! Should you lock into a fixed home loan interest rate in case the rates go up again or ride out any changes that may occur?

In a variable interest rate loan you are subject to market forces. When the rate goes up so does your mortgage repayment. Conversely, when the rate goes down so does your payment but if you can keep the repayment at the previous level you will be helping reduce the interest portion.

In a fixed interest loan the rate will not change during the fixed period. When the interest rates rise you will be better off than those with a variable rate. Conversely, when rates fall you will still be repaying a higher interest rate.

Other choices offered by the lenders include a combination loan (fixed and variable terms), capped (the rate cannot rise beyond a certain rate), collared (sets an upper and lower interest rate) and interest only (only the interest portion is repaid until the last. This is discussed further in Investing.)

The associated costs

Many lenders offer similar products so one method of comparison is to compare the costs associated with the loan.

The main cost associated with the loan is the interest rate. There may also be a loan application fee and ongoing fees.

You may have to pay an application fee (but some lenders have special offers when the fee is waived) and ongoing fees if the product has them. There are many other fees which may or may not apply to your particular situation. Here are a few:

Additional repayments fee - a fee when you make an additional
payment (on fixed rate loan this can be significant).
Break cost - a fee charged when you exit a fixed interest rate before
the end of the fixed period (varies according to the lender).
Combination loan fee - a fee for having part of your loan at a fixed
rate and the rest at a variable rate.
Deferred establishment fee - the establishment fee is charged only
if you exit the loan early on in the loan period (perhaps 3 to 5 years).
Exit fees - a number of fees charged when you pay off or exit a loan.
Late payment fee - a penalty flat fee or a higher interest rate charge
on the balance of the loan if you fall behind with your payments.
Mortgage discharge fee - a fee to transfer ownership of the property to the borrower when you pay out your mortgage. There will also be state government transfer fees.
Ongoing fees - a fee for having a mortgage.
Portability fee - a fee for moving your loan over to a new property
when you move.
Redraw fee - a fee for making a redraw.
Refix fee - a fee for refixing a loan at the end of the fixed term.
Switch to fixed fee - a fee for switching from a variable rate loan to
a fixed rate loan.

The loan features

It is important to choose a loan that suits your needs so that you aren’t paying for features you can’t use. The flexibility of the loan is also important as your personal and financial circumstances may change in the period of the loan.

Putting a value on loan features and flexibility is not easy so the best way to compare the various products is to draw up a list of all the features you want and the associated charges to find your ideal loan.

Points you should consider are:

Additional repayments - can result in significant savings in interest.
Portability - so you can keep your loan when you purchase another property. This may involve a fee but it will be considerably less than the cost of establishing a new loan.
Ability to switch to a fixed rate - when interest rates rise. Some lenders charge a fee or make you pay out the loan and establish a new one.
Redraw - so you can access the amount you are in advance on your mortgage. Some lenders charge a fee for this after a certain number of withdrawals.
Refix - lets you lock into another fixed rate at the end of the fixed rate period. Some lenders charge a fee for this.

Remember that choosing a home loan is probably the biggest financial decision you will make so gather your information, analyze it thoroughly and don’t be afraid to ask questions. The right choice may save you thousands of dollars in the end.

When you've made your choice, the next step is applying for a loan.

 

 

 

 
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