With so many home loan options in the market, it can be tough choosing the right one for your circumstances.
There are several factors to consider before signing on the dotted line, and the right loan depends on whether you’re first home buyers, refinancing a loan or buying an investment property.
Features first-home buyers need
If you choose a loan with a reduced introductory rate, also known as a “honeymoon loan”, make sure it also has a redraw facility, says Goro Gupta, CEO of Momentum Mortgage and Finance.
“You may not get access to this facility if you choose a loan with a fixed rather than variable rate,” he said.
Honeymoon loans typically offer a discount to the interest rate for the first year, with the rate often, but not always fixed. Read the fine print to understand what you’re getting and to make sure the rate is not loaded up down the track.
Gupta also warns first-time buyers to be wary of buying with a high loan-to-value ratio (LVR). “This is situation-dependent, but instead of getting a higher LVR loan and paying lenders’ mortgage insurance, it may be more beneficial to get a smaller personal loan to build a large enough deposit, so you don’t need to pay LMI.”
An offset account is a common feature of a full-service loan. Steve Jovcevski from comparison site Mozo says this is a feature that’s not always useful for a first-home buyer as it typically adds to the cost of a loan.
“First-home buyers won’t usually be able to pay off a lot more than the minimum amount during the first few years of property ownership. So, an offset account may not be high on the priority list. It may be better to opt for a loan with a low rate rather than one with lots of features.”
First-home buyers should look for an overall good deal when choosing a loan, according to Vadim Taube, chief executive of comparison site InfoChoice. “They may want to consider good value credit cards and discounts on insurance,” he said.
Taube is also cautious about the value of offset or redraw facilities. “Technically, money in an offset account will offset the principal on the home loan,” he said. “With home loan rates at such low levels, there may be a better option for these funds to earn a return.”
“We’re finding investors or more experienced borrowers are choosing loans with an ultra-low rate that some of the online lenders provide, rather than opting for a loan with a redraw or offset facility.”
Options for refinancers
If you’re already some way down the home-ownership track and you’re refinancing your loan, Jovcevski suggests choosing a loan with an offset account. “This allows borrowers to use their salary to offset their loan repayments and results in a considerable saving over time.”
The other major option is an interest-only loan versus a principal and interest loan. Jovcevski recommends owner-occupiers choose a principal and interest loan to ensure they are building equity in the property. “Principal and interest loans attract a lower interest rate and borrowers should look for loans with the lowest possible rate.”
When it comes to refinancing an owner-occupier loan, Gupta does not recommend borrowers refinance until at least two years into the loan. “Exit fees can be high and eat into any gains made by moving to a mortgage with a lower rate.”
Strategies for investors
Investors who negatively gear their property often choose an interest-only loan. “Although you won’t pay down the principal, if you’re an experienced investor that might be a good option if you’re using the money you would have used to repay the loan to buy something else,” said Jovcevski. “But a principal and interest loan will save you a lot of interest over time compared to an interest-only loan.”
For property investors who are also paying off an owner-occupier property, Gupta points to a loan that covers both properties but offers a comparatively low rate on the main home and a higher rate on the investment property. “There are loans available for primary residences with rates as low as two per cent.”
This may work well for people who negatively gear their investment property to enable them to claim the higher interest on the investment property as a tax deduction.