How to choose a home loan
You’ve probably heard about basic, standard, offset, fixed, split, and package loans. But what does it all mean? And how can you compare them? Here’s what you need to know.
Choosing the right home loan is an important part of your home buying journey – and one that takes you a step closer to owning a place of your own! But with so many types of loans, how do you know which is right for you?
Factors to consider when choosing your first home loan
Choosing the right loan starts with understanding the different types of loans to decide which is right for your needs.
Basic home loan – this type of loan often comes with a competitive interest rate, and while you may not get all the bells and whistles – you shouldn’t pay for loan features you’re unlikely to use with a higher rate either.
Standard variable rate loan – a ‘variable’ rate means the interest rate you pay can move up or down over time. When that happens, your monthly repayments will also fluctuate. However, a big attraction of a standard variable rate loan is the opportunity to make use of a wider variety of features (more on these later).
Offset home loan – an offset home loan features a separate savings or transaction account linked to
Fixed rate loan – a fixed rate loan lets you lock into a set interest rate for a fixed term, usually between one and five years. Your repayments will remain the same during the fixed term, which can be good for budgeting. The downside is if market rates fall, you could pay more than necessary on your home loan.
Package home loan – A package loan combines a home loan plus a number of other financial products like a credit card or everyday account, all with the same lender. You could enjoy savings and discounts – especially on the loan rate, in return for an annual package fee.
Interest only loan - With an interest-only loan, the monthly repayments are comprised only of loan interest – there is no reduction of the loan balance. This can lower your repayments, which frees up extra cash. However, the loan balance will remain unchanged and this can mean paying more in interest costs over time.
Home loan features matter because they can help you enjoy savings, convenience and flexibility on your loan.
Some of the main loan features to consider include:
- Extra repayments – paying a little more off your loan when you have some spare cash cuts time and money from your loan.
- Redraw – this handy feature lets you draw any extra repayments back out of your home loan. It can be useful if you need cash for unexpected bills.
- Option to split – if you can’t decide between a fixed or variable rate, the lender may let you split the loan between fixed and variable rates.
- Choice of repayment frequency – it can help to time your loan repayments with
pay days, and being able to choose between weekly, fortnightly or monthly repayments gives you the option to do this.
Using comparison rates
A low rate home loan can come stacked with fees. This is why it pays to look at the comparison rate to know how much a loan will really cost.
The comparison rate takes into account the interest rate plus many other fees and charges, to give you a better idea of the true cost of a loan, and make more of an “apples for apples” comparison with other home loans. It could save you applying for what appears to be a cheap loan, only to find you’re paying high fees.
The comparison rate is a handy benchmark but the interest rate should not be the only factor you look at when choosing a home loan. It’s still important to think about which loan features are useful for your circumstances.
Talk to us for expert help choosing the home loan that is right for you.
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- Chapter One : Getting started
- Chapter Two : Your dream home
- Chapter Three : Money matters
- Chapter Four : Ways to purchase
- Chapter Five : Understanding interest rates
- Chapter Six : Understanding home loans
- Chapter Seven : Lending sources
- Chapter Eight : Getting your loan
- Chapter Nine : Choosing a home
- Chapter Ten : Steps to settlement