These days, when it comes to home loan options, it can feel like you’re drowning in choices. Different lenders, different products, different features – the options can be overwhelming. But they don’t need to be. Choice Home Loans broker Scott Erickson, who’s spent three decades in the mortgage broking industry, shares his tips on shopping around for the perfect home loan.
Define your goals
Understanding your financial goals is key to finding the most suitable mortgage product for you. For example, do you want to pay the loan off quickly while paying the least amount of interest? Would you prefer your repayments to be a predictable cost? Do you need the flexibility of a redraw facility (borrowing money you’ve paid into your loan)?
It’s also important to look at the fees and charges: there may be an establishment fee and account service charges that could offset any savings in interest.
Decide between a fixed or variable rate
A fixed rate loan may look attractive. The rate is set for a certain period (usually two to five years), which makes repayments predictable. But the conditions may limit extra repayments.
So, Erickson says, if you pay a quarter or half a per cent more interest for a variable rate loan, you may be able to pay more off the loan faster, reducing the interest you pay over time by making more frequent payments, or paying lump sums into the loan.
“The more often you pay, the less interest you’re going to pay over time because interest is calculated daily. Many people don’t understand how much extra payments are going to save them,” says Erickson.
“Not many people know that there are some second-tier lenders that offer fixed rate loans with full offset accounts. Brokers know there are options available that will assist in saving borrowers money.”
Consider offset plus credit card packages
Most lenders now offer packages consisting of a loan account, offset account and credit card with interest free days.
Erickson says, “The way I like to manage clients is under a package-style product, where they’ve got a credit card linked to an offset account. You put funds such as your salary into the offset account and don’t touch it.”
The money in the offset account is deducted from the loan balance, for the purpose of calculating interest, for as long as it’s in the offset account – saving interest.
“There can be a greater financial benefit to you, than if you had that money sitting in a savings account,” says Erickson. “In a savings account you’ll probably earn no more than 1%pa in interest on your savings. But if you’ve got that money sitting in your loan offset account you could be saving five per cent interest on that amount.”
You use the credit card for your expenses, and at the end of the month pay the full credit card balance from the funds in the offset account. This means you make use of the interest free days on your credit card account without paying interest.
A package like this offers other kinds of flexibility, too. For example, you may be able to get additional finance for a renovation or an extension without paying another loan establishment fee.
Use a broker for flexibility
While you can choose elements of the package – home loan, offset account, credit card – there isn’t much scope to customise most loans beyond that. Also, if you go directly to a bank, you’re generally limited to that bank’s products. A broker can help you find a bit more flexibility.
“Sometimes the options are quite similar, but a broker is aware of rate variances,” says Erickson. “If we’re talking about the four majors [banks], their rates are about the same. But with a broker you could go to a second-tier lender who still has packages but doesn’t charge fees.”
Australian Security and Investment Commission. Choosing a Home Loan.