Choosing the Right Home Loan
by Nick Carydias, Senior Mortgage & Finance Adviser
When you go shopping, whether it’s for clothes, a television, even a car or a house, you’re likely to know exactly what you’re after, what will suit your needs, as well what’s in your price range. Most of us also research and compare products to ensure we’re getting good value for money and exactly what we’re after. It would certainly be stupid not to look at all the options.
Likewise, you should take the time and the effort to understand the various home loan products and packages that are available to you, if only because, unlike other purchases you’ll make in your lifetime, your home loan will be an ongoing commitment – possibly for decades. So you need to be sure it’s set up right and tailored to your individual needs.
Many of the people I help to refinance have been set up with an incorrect product or package, one that doesn’t suit their needs and will often end up costing them far too much. This is usually due to the client not being aware at the time of all the options available, and then allowing themselves to be led blindly towards the wrong product.
Here is an outline of the various products and packages available to borrowers today. Each is designed to suit a different need.
The basic product. A straightforward, no frills product that generally has both a low rate and low ongoing costs (even none at all). It’s designed for first home buyers who are looking at their first mortgage and want to reduce it as quickly as possible. Lenders may also offer honeymoon rates on these products, giving you a further interest rate discount for a certain period of time (usually one-to-three years). After this honeymoon period, the rate reverts to a higher level.
The professional package. This package is very similar from all lenders. They generally have an ongoing package fee starting with a three at the front ($350, $340, $330 and so on) and give you a discount based on the amount of your loan. Generally, if your lending is above the $350,000 mark, the rate will be comparable to a basic product rate, and if your lending is above the $650,000 mark, you’ll get a higher discount (which will be lower than a basic product). The main advantage of the professional package is that you can enjoy such features as an offset account, multiple loan split, line of credit, free evaluation, cheaper insurance, fee-free credit card, plus the ability to add extra loan products in the future at no additional cost. It’s generally designed for those with multiple loans who are active in the property market, or who have large loan amounts.
The medico package. A unique product offered by one of the lenders which is designed specifically for doctors and medical staff. This package waives the lenders mortgage insurance fee for clients. This can save you thousands of dollars, depending on the cost of the property. If you’re in the medical industry and qualify for this niche package, you should take full advantage of this whenever possible.
The low doc loan and package. Low doc loans and packages are specifically designed to help self-employed applicants who find it difficult to produce all of the paperwork relating to their income that’s required for a standard loan. They’re assessed differently by the lender, with the result that, in most cases, there are higher fees and interest rates, as well as restrictions on the amount of lending (usually a maximum of 80 per cent). These types of loans are becoming scarce now, and lenders that do provide them are being very cautious on what they’ll approve.
The line of credit. Line of credit mortgages are generally interest-only loans with no set term for the loan to be repaid. The borrower has the freedom to decide when they’ll make payments on the principal, which may suit some borrowers better than others. Interest is only calculated on the balance outstanding, so if the line of credit facility isn’t being used, no interest will accrue.
A line of credit may suit those with fluctuating incomes who may sometimes be able to make additional payments, but also, at times, be unable to make regular repayments on a ‘normal’ loan. You’ll find that most lenders who offer the line of credit product charge a slightly higher interest rate and, in some cases, a fee for this facility. The product is designed to suit people who need greater flexibility on their loans and are willing to pay for it with a slightly higher interest rate.
The reverse mortgage. This is a product that allows you to draw funds (between 15 per cent and 40 per cent of the property value) against your home. The amount you can borrow is dependent on your age: the older you are, the more you can borrow. This loan is usually only available to people aged 60 and above. Regular repayments are not generally required, until you leave and move into care, sell your home or pass away. When the loan ends, either you or your estate must repay what’s still owing, usually out of the proceeds of the sale of the property.
Each year the fees and interest you would normally pay are added to the loan balance, and over time you're charged interest on the interest (compound interest). This increases the total amount owing.
These loans usually have higher interest rates and fees than regular loans, but are designed specifically to assist older applicants who have equity available in their properties, but are unable to obtain a loan via regular means.
As you can see, there are many different options and ways you can set up your home loan. And it’s well worth taking the time to review them so that you can find the one that’s right for you. This is only a brief guide and of course each person’s circumstances vary, so I do encourage you to review your situation carefully and speak to a Finance & Mortgage Adviser or your Financial Adviser.
When it comes to your home loan, take your time, understand what you’re committing to, and ask plenty of questions. Unlike making an impulsive shopping mistake (like buying an uncomfortable pair of shoes, which you may have to put up with for a year), your home loan is a long term commitment and you simply cannot afford to get it wrong.
For more information, or to arrange a complimentary obligation-free appointment with Nick or one of our Finance & Mortgage Advisers please contact a Client Liaison Officer on 1300 726 082 or click here.