Choosing a Home Loan – Part 2

When choosing a home loan, there are a lot of questions you should be asking yourself before deciding on which loan to commit to. RateCity recommend considering the following questions:

1. Are there Exit Penalties?

When choosing a home loan, most people pick a larger fixed term of about 30 years, as this makes the monthly repayments cheaper; however you need to look out for exit penalties that may apply if you decide to pay this loan off faster then initially intended. Exit penalties are mainly referred to by the banks as an early termination fee, and are basically in place to cover the bank’s losses if you decide to exit your loan early. Most loans, you will find, do have exit penalties, so if you plan to pay your loan off early, check out the exit penalty fees to avoid getting caught out!

2. Can I make extra repayments without penalty?

The availability of this option generally depends on the type of loan you purchase. Fixed rate loans usually do not allow you to make extra repayments, as this can put the bank at a disadvantage due to the fixed interest rate. Most variable loans usually allow extra repayments, however conditions to look out for are restrictions to the extra amount you can pay, or fees for paying out your loan early.

3. Do I have redraw?

The redraw facility is mainly available only to loans that allow extra repayments, and therefore it is also generally a feature of variable loans only. This facility allows you to withdraw money from any extra repayments you may have made to the home loan. When applying for a loan, this facility mainly appeals to those who plan to renovate in the future, or purchase items like a car or boat. However, there are often fees for redrawing; so find out about the terms and conditions first.

4. Is my loan portable?

This is a great facility for those who plan to move around, as portable loans give you the benefit of being able to keep your original loan when moving to another property. This option eliminates the need and expense involved in obtaining a completely new loan every time you move. It also avoids exit penalties that may arise when changing from one loan to another. However, this feature often still has fees which will vary according to the bank.

5. Am I able to split this loan?

Split loans, allow you to split your loan amount into different portion of fixed and variable interest. The amount of times you can split your loan varies according to each bank, however it is usually a maximum of about 5. Split loans are especially beneficial at the moment with the various rate rises, as you are able to make extra repayments on the variable part of the loan, as well as having the security of a fixed interest rate for the remaining portion of your loan. There can be fees attached to this facility so ask about them.

6. Can I top up at a later date?

The top-up facility allows you to borrow more out on your loan, as the equity in the value of the house increases in the future. The other way to obtain more money is to refinance but this can be an expensive option, compared to a top-up facility with your existing lender. Therefore if your plans for the future include things like renovation, for which you may need to increase your loan, the top-up facility is helpful.

7. Can the home loan operate like the transaction account?

The closest option to a home loan that operates like a transaction account is most likely an offset loan. This operates like a normal transaction account. You can store and withdraw money from the one home loan account. Your deposits, such as regular salary, will offset the amount of interest charged on your home loan. The downfall of offset loans however, is that they aren’t advantageous unless you keep a substantial amount of money in your account.

8. If I’m well ahead in repayments, can I stop paying for a while?

Depending on the bank, most loans allow you to stop paying for a certain period of time due to other obligations. However the loan has to allow for this feature and it also must be cleared by the bank; usually only granting it for a maximum period of about 12 months. This feature often has fees attached to it and yet has it will allow you to make extra repayments if desired during this ’holiday’ period.

After sorting out all the questions you need to ask, make a list of the facilities that will work for you. Take into account your position at present, as well as your plans for the foreseeable future. This will make it easier to chose a loan that appeals to you most, and will help you to avoid being contracted into a loan that is not right for you. Also remember, that each loan is targeted at a different profile, so there is no black and white advice as to what is a ’good’ or ’bad’ home loan. Therefore it is important that you shop around to find a loan that is ’good’ for you.

Feel free to contact us on +61 2 9476 0000 if you have any further questions about choosing a home loan and we can put you in touch with a mortgage broker.