Choosing a home loan
Look for the right home loan
When choosing a home loan, it's important to work out the
features you need from your loan and how much it will cost you
in fees. Here we outline the types of loans available and what
you need to consider before you sign up.
How to compare home
loans
The best way to compare home loans is to ask for a key facts
sheet from different lenders. The key facts sheet will give you the
information you need, in a set format so you can directly compare
features, interest rates and fees.
The key facts sheet will tell you the total amount to be paid
back over the life of the loan, repayment amounts, fees and
charges.
It will also give you a personalised comparison rate to help you
check the total cost of a loan against other loans.
Credit providers must give you a key facts sheet for a home
loan, if you ask for one (but not for interest-only loans or line
of credit home loans).
Here are some examples:
Warning
Be wary of companies that offer loans that claim to pay off your
mortgage faster. The only way you can do this is by increasing your
repayments or finding a loan that has low fees and a low interest
rate.
Principal and interest
loans
Most people take out a principal and interest home loan, where you make
regular payments against the principal (the amount borrowed) as
well as paying interest. This type of loan is designed to be repaid
in full over the life of the loan.
A credit provider will usually offer a number of different
principal and interest loans, with a range of features such as a
redraw facility or an offset account. Generally
the more features a loan has the higher the cost will be. The loan
is usually repaid over an agreed period of time, such as 25 or 30
years.
Get an indication of how much you can borrow or how much your
repayments might be.
Mortgage calculator
Interest-only
loans
As the name suggests, your repayment amount will only cover the
interest on this loan. The principal amount you borrowed will not
reduce unless you choose to make extra repayments. Paying interest
only may cost you more over the term of the loan because you're
paying interest on a principal that doesn't reduce. See interest-only
loans for more information.
Work out how much your repayments will be before and after the
interest-only period.
Interest-only
mortgage calculator
Variable, fixed and split
rate home loans
Lenders will usually offer several different interest rate
options:
- Variable interest rate - The interest rate on
your loan can go up or down, usually in line with a change to the
official cash rate (but lenders may make changes independently of
cash rate changes).
- Fixed interest rate - The interest rate on
your loan will remain unchanged for the fixed period. This is
usually 2-5 years, after which your loan will usually revert to a
variable rate loan.
- Split loan - This is where part of your loan
is variable and part is fixed.
See interest
rates for a more detailed description and variable versus fixed home
loans for the pros and cons of each option.
Making extra payments
Paying a little bit extra will save you interest and get your
loan paid off quicker. However, most fixed rate loans will limit
the amount of extra payments you can make each year. There may also
be penalties for paying out a fixed rate portion early.
Redraw, offset and line
of credit
Offset account
This is a savings or transaction account linked to your home
loan. Your account balance is taken off the amount you owe on your
home loan, reducing the amount of interest you pay.
For example, if you have a home loan of $500,000 and a balance
of $20,000 in your offset account, you only pay interest on
$480,000.
If the balance of your offset account is low, the additional
costs may outweigh any benefits you get from having it. Be
realistic when calculating the expected benefit an offset account
may give you.
Redraw facility
Having a redraw facility allows you to pay extra money into your
loan that you can take out (or redraw) later if you need it.
The extra money you pay into the loan reduces your loan balance
which reduces the interest you pay. Your loan balance will
still reduce each month according to the terms of your loan.
Credit providers may impose conditions or a fee to redraw funds.
You should check what conditions and charges apply to your
loan.
Loans that allow you to have your whole pay credited to the loan
account and pay bills or use EFTPOS
to withdraw funds are operating with a redraw facility.
Line of credit loans
A line of credit is a loan where a credit limit is set and you
can spend up to that credit limit.
Typically you would have your wages paid into the account and
pay your bills and other expenses out of the account.
The limit on the line of credit is fixed and does not reduce as
you repay the loan. This means you can always draw up to this
limit. You will need to repay the loan in full eventually, usually
by a specified date, which you will need to plan for.
This type of loan suits someone who is a disciplined and
careful budgeter who may have irregular income.
Extra features can mean extra costs
Features like redraw, offset and line of credit can be useful
but they may come at a cost. Loans with these features may have a
higher interest rate or a product fee, so think carefully about
which features you really need.
See our page on using comparison
websites if you want to compare loans online.
Portability
It is common for people to move house before they have finished
paying off their mortgage. Loan portability is a feature that some
lenders offer that allows you to transfer your existing loan from
one property to another.
It helps the lender keep you as a customer and it saves you
money on things like exit fees (banned on loans taken out after 1
July 2011), and application fees (although some lenders
may charge you a fee for swapping over the secured property).
Loan portability also allows you to keep features of your loan
such as the interest rate, online banking, ATM card and cheque
book, as you will have the same lender and loan structure.
Portability is usually only a feature of variable rate loans. If
you have a fixed rate loan you may incur break costs so check with
your lender first.
To transfer your loan from one property to another, both your
sale and purchase properties must settle on the same day, which can
be quite difficult to arrange.
Each lender has different rules about loan portability so make
sure you understand the portability rules of the loan you are
considering. You should also check that there are not more
competitive loans on the market from other lenders.
Bridging loans, loans for
building and renovating
Bridging loans
Bridging loans may be used to manage the transition between
buying and selling properties. These are used by people who buy a
new home before selling their existing home or who are building a
new home.
There are typically two types of bridging loans. After assessing
the level of equity available in your existing home, the lender
may:
- Offer a single loan taking both properties as
security - They will then give you a bridging period (6-12
months) in which to sell your existing property. Generally you will
only have to make interest payments during this period. Once the
first home is sold, the proceeds are put towards your overall debt
and the balance (end debt) will either revert to principal and
interest repayments or you will have to enter into a new loan.
- Offer a separate loan for the property being
purchased - You will not need to make repayments on this
loan during the bridging period. Interest will accrue on the new
loan and you will still need to make your normal repayments on your
existing home loan. When your existing home is sold and the
original home loan is paid out, the outstanding debt on the new
property will need to be renegotiated.
Think carefully before taking out a bridging loan. If you don't
sell your existing home within the bridging period, you may have to
accept a price lower than you expected, leaving you with a larger
end debt to repay.
Loans for building (construction loans)
If you are building a new home, you may need a 'construction
loan'. With this type of loan you withdraw funds in stages, as you
receive bills from trades people and suppliers. You'll only pay
interest on the funds you've used.
Most lenders offer their construction loans at a variable interest rate. Once the
construction is finished, the loan will revert to principal and
interest repayments.
Approval for a construction loan often requires plans, permits
and a fixed-price building contract.
If you're an owner builder you may be able to apply for a
construction loan without a fixed-priced contract, but the lender
requirements may be stricter and the loan amount less.
You can get more information on building a home from your
state's fair trading or consumer protection agency.
Loans for renovating
Basic renovations and home improvements can usually be
funded through your home loan. If you only require a small amount
for your project, you may be able to redraw additional funds from
your current home loan.
Vendor
finance
With vendor finance the owner (vendor) of a property may
offer to provide finance to you as the purchaser.
There are different types of vendor finance. You may pay a
higher interest rate than you would for a standard home loan, for
example, a vendor loan may be 2-2.5% higher than a bank's standard
variable home loan rate. You may also pay a premium to the vendor
over and above the purchase price of the property.
Your rights can vary a lot depending on the vendor finance
scheme you sign up to. In some cases you may not have
protection offered by the National Credit Act,
such as financial hardship provisions. You may also not have access
to external dispute
resolution if things go wrong.
Under an instalment sales contract or a rent to buy scheme, you
may not legally own the property until the final
instalment is paid to the vendor.
If the vendor has borrowed money to buy the property and they
default on their loan, you may lose any possibility of ownership,
even though it is not you who is in default. If this happens, your
only recourse may be to take legal action against the vendor.
If you are considering vendor finance, you should get
independent legal advice.
Instalment sales
An instalment sales contract is where you agree to purchase
property from the seller through a series of instalments. This type
of arrangement is very similar to a bank loan in that you will make
principal and interest repayments over a long period of time.
Here are some other features of instalment sales:
- The seller is responsible for all rates, insurance and taxes
but will usually require you to reimburse any rates or
insurance
- You are responsible for all repairs and maintenance
- You will have an equitable interest in the property
- You can usually refinance with a traditional lender at any
time
- If you default on your repayments, the contract could be
terminated and you could lose your deposit and any repayments
already paid
Rent to buy schemes
Rent to buy or rent to own schemes usually include
a standard residential tenancy agreement and an option to
purchase the property.
Other features of rent to buy or rent to own schemes
include:
- The seller is responsible for all rates and taxes
- The seller is responsible for all repairs and maintenance but
may encourage you to carry out renovations by offering a sweat
equity credit. This is a reduction in the purchase price to
compensate you for the work (sweat) you have put into the
property
- You will have an equitable interest in the property
- Payments are fixed for the duration of the rental contract
- If you miss any payments, the contract could be terminated and
you could lose any deposit credits already paid and forfeit your
option to purchase the property
Before you get involved in a rent to buy scheme, contact your
state's consumer affairs or fair trading agency to better
understand your rights and obligations.
There are many things to consider before you
sign up for a loan. Do your homework before you sign up to make
sure you are getting the best deal.
Related links
Last updated: 26 Mar 2018
