What Is The Best Home Loan?
There is no such thing as ‘The Best Home Loan’. What is the best home loan for you is not the best home loan for someone else.
In this blog, we check out what to look for in a home loan.
How To Look For The Best Home Loan
This needs to be ‘look for what is best for you’. The lenders won’t change their home loans to suit your needs. There will however be product features and benefits that will either closely or loosely fit with your requirements. You need to be able to match these requirements as closely as possible to what you want. Then you should be able to find the best home loan to suit YOUR needs.
This needs to be done by a series of questions by your mortgage broker and will look at not only your immediate needs, but also your future needs. Remember, a home loan is taken over many years. You need to consider where you will be in one, three, 5 years time, even longer.
Is A Redraw Option Right For You?
The options available on a home loan are numerous. One is the ability to have a redraw on the home loan. The ability to pay your loan off faster than the minimum required, however keeping the option of having access to your surplus repayments if you need them. Most loans now have this facility, although it may be restricted on a Fixed Rate Home Loan.
What About An Offset Account?
Maybe you want an Offset Account. You may have heard of this option, but what is it? An Offset Account is a transaction account that is linked to your home loan. You won’t earn interest on your funds held in the Offset Account, however you will save on the corresponding amount on your home loan. For Example, lets say you have your own funds in your Offset Account of $10,000- and you have a Home Loan of $250,000-. Lets say your Home Loan has an interest rate of 3.72%p.a. (NB, this is just a figure, not related to anyone or any loan). If this was the case, then you would get charged interest on $240,000- of your home loan at the prevailing rate (in this example 3.72%p.a.). On the remaining $10,000- you would not get charged interest. This is because the $10,000- is ‘Offset’ by the amount in the transactional Offset Account.
What About A Fixed Rate?
As the name suggests, a Fixed Rate Home Loan has an interest rate that is fixed for a period of time. This will generally be for between one and five years. Some lenders also have loans that can be fixed for seven or ten years. This option may be good if you’re on a fixed income and want set repayments for a set period of time. This avoids surprises from potential increases in interest rates. Another reason may be you are a First Home Buyer and want to have some certainty while you are still getting used to having your own Home Loan. Or maybe you’re on a reduced income while you have young children. However you know you can increase your income when you are both in full time employment again in the future. You may want the certainty a Fixed Interest Rate can bring in that period of reduced income. Some lenders will allow Redraw or an Offset Account on a Fixed Rate Home Loan, but generally these are not options.
Should You Take A Split Interest rate?
This is the option where you take part of your loan as a Fixed Rate Home Loan and part as a Variable Rate Home Loan. You may want the best of both worlds. You may want the certainty of repayments that a Fixed Rate Home Loan offers. However you may have some spare funds that you want access to. Or you may want to make extra repayments and reduce you loan quickly still. Therefore either a Redraw or an Offset Account may make sense.
Should I Pay Lenders Mortgage Insurance?
Lenders Mortgage Insurance – or LMI – is paid when you don’t have 20% deposit of equity available. Don’t confuse Lenders Mortgage Insurance (LMI) for Mortgage Protection. LMI covers the lender, not you. It has nothing to do with replacing income if you can’t work or giving you a lump sum if you are injured or sick. LMI covers the bank in the case of you not being able to make your repayments and the lender has to take repossession action on the security property. If the lender has to repossess and sell the property and there is a shortfall where they cannot repay the debt owing, then the LMI policy will cover the shortfall. That is not the end of it though. If there is a short fall, then the LMI company will attempt to recover that shortfall from you. In saying this, taking a loan and requiring LMI is not a bad thing. It will depend on your ability to save money quickly. It will also depend on the direction of the housing market. If the market is rising quicker than you can save, then by waiting, you may in fact pay more LMI. If you have funds now and the market is increasing quickly, you may be better off paying LMI and reaping the benefits of an increased house price in the future.
What About Getting A Guarantee?
One way of avoiding LMI may be if family members can assist you with a Security Guarantee. They would need to use their existing property as additional security to your own. This puts their property at risk of repossession action should you not meet your commitments. This makes it a big commitment on the guarantors part and something they need to consider. They should take their own legal and financial advise before agreeing to providing a guarantee. Generally it is mandatory to get advice when taking out a guarantee. How it works is the lender secures most of the loan against your property (normally 80% of the property value). They then take a mortgage over the Guarantor Security property to secure the remaining amount (the remaining 20% less any cash deposit being made). Remember, a Security Guarantee is not just the family member saying they will help with repayments should you get into trouble. It is also saying they are willing to use their property to secure your debt. Putting there pace at risk of being repossessed should you not keep up with your commitments. We can’t stress this enough!
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The Home Loan Comparison Co. compares home loans from a much wider variety of banks than most people have time to consider, and we find the loan that suits your goals.
We are experienced, knowledgeable and dedicated to building ongoing relationships to keep on providing personal and valuable service that is rarely experienced when dealing with the banks.