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Home Loan Rates

Home loan rates can vary considerably among the different types of products offered by home loan lenders and the market is highly competitive. It is important for borrowers to understand home loan terminology and how to compare home loan rates, terms and conditions before they commit to a home loan product.

How to compare home loans

Comparing home loan rates, terms and conditions requires an understanding of home loan:

  • Interest rates.
  • Features.
  • Repayment types, and
  • Fees.

Home loans are long-term financial commitments by borrowers. Even small differences in any of these variables can significantly affect the amount that borrowers repay over the life of a home loan.

Comparing interest rates

Two home loan interest rates are typically advertised on a home loan product: the nominal and the comparison. The comparison rate is the higher of the two and provides the total cost of the loan. It includes both interest and all associated fees/charges.

Under the National Credit Code in Australia, lenders are legally required to provide borrowers with the comparison interest rate on their products. This allows borrowers to accurately compare the total costs of different loan products.

Comparing features

Home loan products can have a variety of features. The most common include:

  • A redraw facility. A redraw facility allows borrowers to reborrow funds that they have repaid on their home loan if they need to.
  • The ability to make extra repayments (i.e. in addition to their scheduled minimum amounts). This benefits borrowers because the entire additional repayment amount comes off the loan principal (i.e. the initial amount borrowed). It therefore reduces their outstanding balance, which reduces the future amount of interest charged.
  • Portability. This feature allows borrowers to move their loan to another property without the need to go through another application process. For example, when a borrower sells their home to buy another one and settlement occurs on the same day.
  • Offset accounts. This allows a borrower to offset the balance of the deposit funds that they have in a separate offset account with the lender against their outstanding home loan balance. For example, if a borrower has a home loan balance of $200,000 and $10,000 in an offset account, they would only be charged interest on $190,000 (instead of $200,000).
  • Lines of credit. A line of credit is a form of home equity loan. It allows borrowers to borrow against the level of equity (ownership) that they have in their home, up to a pre-defined limit. Borrowers can build up their equity over time via their home loan repayments and their home increasing in value.

Repayment types

Home loan repayment options can be broadly categorised as being in one of two categories:

  • Principal and interest, and
  • Interest-only.

Principal and interest loans are the most common type of home loan product. Each borrower repayment on these types of products is greater than the amount of interest being charged by the lender on the loan. This allows the principal to be gradually reduced over time until it is repaid in full, including all associated interest charges and fees.

In addition, lenders typically offer principal and interest home loan borrowers some flexibility in terms of their repayments. For example:

  • Table repayments. The amount of the borrower’s regular repayments stays the same over the life of the loan.
  • Straight-line repayments. The borrower’s repayments reduce slightly with every repayment as the principal reduces. Borrower repayments are highest at the start of the loan.
  • Salary crediting. This form of repayment is available with line of credit home loans. A borrower’s entire salary can be deposited into their home loan and they can draw on these funds as needed up to a pre-defined credit limit.

Interest-only home loan repayments involve the borrower only repaying the interest component for a defined time period (usually two years for an owner-occupied property, and up to five years for an investment property). The principal therefore doesn’t reduce during the interest-only period. It must be repaid in full at the end of the interest-only term. The borrower may then choose to sell the property or convert to a principal and interest loan.

Find out what your monthly home loan repayments would be with our range of home loan calculators

Fees

Home loan products can have a variety of fees. The amounts charged vary between lenders and depend on the features of their different types of products. Home loan fees can be broadly categorised as being one-off or ongoing.

Direct one-off home loan costs can include:

  • Loan application fees. These are sometimes referred to as establishment or set-up costs.
  • Lender’s mortgage insurance (LMI). This is the insurance cost to protect the lender if the borrower defaults on their repayments. LMI is usually required if the loan-to-value ratio (LVR) is higher than 80%. The LVR is the amount of the loan expressed as a percentage of the market value of the home. For example, an 80% LVR on a house worth $600,000 is $480,000.

There are also indirect one-off home loan costs such as:

  • Home valuation fees. These charges cover the lender’s cost of having the borrower’s property valued by either their own valuer or a third party prior to approving the loan.
  • Legal fees. These include the costs of preparing legal documents associated with the home loan, such as settlement agreements and contracts. They also cover conveyancing services, which is the transfer of a property’s title from the seller to the buyer (i.e. the borrower). The lender may also charge a search fee to check a property’s title prior to approval.
  • Stamp duty. This is a government cost imposed on property buyers in Australia. The amount of the charge depends on factors such as whether the purchaser is a first-home buyer, the geographic location of the property, and its value.

Ongoing home loan costs can include monthly or annual charges for items such as:

  • Interest. Home loan rates can be fixed, variable, or a combination of the two.
  • Service fees. These are sometimes referred to as administration fees.
  • Extra repayment fees. Some types of home loan products (such as many fixed interest loans) charge to allow borrowers to do this.
  • Redraw fees. Some lenders will charge for providing this facility.
  • Late repayment fees.
  • Switching fees. For example, if you decide to switch from a fixed interest loan to a variable interest loan there may be a fee for breaking the fixed term agreement.
  • Portability fees.
  • Early discharge or exit fees. For example, when settling or refinancing a home loan if it was taken out before 30 June 2011. Lenders cannot charge exit fees on loans taken out after 30 June 2011.
  • Discharge fees. Lenders may charge a fee to cover the cost of finalising the associated paperwork when a home loan is repaid, including transferring the title deeds.

The bottom line

Taking out any type of home loan is a major financial decision. The market is highly competitive and there is a vast range of products on offer from lenders. It is worthwhile for borrowers to seek professional advice to compare home loan rates, terms and conditions. This allows the most appropriate home loan product for the borrower’s individual financial circumstances to be identified.

If you would would like more information about home loan rates book an appointment to speak with one of our home loan specialists. Or start to compare home loans online .