There are a lot of questions you will need to ask yourself when looking for a home loan. Which lender is right for you? Do you want a fixed or variable interest rate? What are the features you can’t live without?
Finding a loan that ticks all the boxes can be a difficult task, but there are steps you can take to make it easier for yourself. Below we cover a few things you need to keep in mind when shopping for a home loan in 2022.
Consider different lenders
Most Australians tend to get a home loan from the institution they’ve dealt with for most of their life – usually one of the big four banks – but that’s not always the best option.
Rather than reflexively going to the bank you keep your savings with, be sure to look around and see what other lenders are offering. It often happens that online lenders have higher rates because their overhead costs are not as high.
You might also find that different lenders will allow you to borrow different amounts. This is because lenders vary in how they perform their utility testing, and some may use lower valuation rates to assess customers’ ability to repay a loan.
Understanding Compare Rate
When advertising their home loans, lenders are required to show what is called a comparison rate. This number combines the advertised rate with any additional fees associated with the loan, giving you a more accurate picture of its cost.
For borrowers, the comparison rate is a useful tool for evaluating different options. You may find that a loan with a low rate but lots of fees may have a higher comparison rate than a loan with an average rate and no fees.
Consider the direction interest rates are heading
Every time the Reserve Bank of Australia changes the cash rate, lenders tend to change their mortgage rates by a similar amount. Having an idea of how interest rates are changing can help you decide what type of loan you should take out.
For example, if rates fall, opting for a variable rate can allow you to take advantage of any price drops over time.
Likewise, a fixed rate may seem like a good idea if rates tend to rise, but the banks may already have a head start on you. Fixed rates are predictive in nature, meaning that lenders take into account what the interest rate environment will look like in the future when setting them.
Months ago, when it became clear that the RBA would raise the cash rate, lenders began to remove many of their low fixed rate offers. Nowadays, fixed rates have overtaken variable rates as the more expensive of the two.
Know what features you want
It’s not just the interest rate in a home loan. You will also need to think about the features you plan to use. Some common characteristics include:
- The ability to make additional refunds
Try to limit them to a few “must-haves” – features you’re sure to use – so you don’t pay more than necessary.
Just keep in mind that fixed rate loans tend to be more limited in the features they offer than variable rate loans. For example, not all fixed rate loans allow you to make additional repayments, and those that do may limit the amount you can pay each year.
Consider your credit score
When it’s time to search pre-approval, it’s a good idea to limit the number of applications you send. Indeed, each time a lender checks your credit report, it triggers what is called a “thorough investigation”.
Too many difficult applications in a short period of time can give banks the impression that your applications are being rejected, which can end up hurting your chances of being approved.
So, instead of applying to multiple lenders hoping to find the best deal, do plenty of research beforehand and focus on one or two lenders that seem to be the best fit.
Sign up for the shortest time you can afford
Extending the term of your home loan can make it easier to manage your repayments, but you’ll end up paying more interest in the long run. Try to choose as short a duration as possible while leaving some leeway in your budget.
Ready to start your search? Visit our home loan comparison page, where you can filter your search by rate and type.
ATTENTION: This comparison rate only applies to the example or examples given. Different amounts and durations will result in different comparison rates. Costs such as withdrawal charges or prepayment charges, and cost savings such as fee waivers, are not included in the comparison rate but may influence the cost of the loan. The comparison rate displayed corresponds to a guaranteed loan with monthly principal and interest repayments of $150,000 over 25 years.
Initial monthly repayment figures are estimates only, based on the advertised rate, loan amount and term entered. Rates, fees and charges and therefore the total cost of the loan may vary depending on the amount of your loan, the term of the loan and your credit history. Actual repayments will depend on your personal circumstances and changes in interest rates.
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