Five expert tips on getting the best loan

It’s a big commitment, so it’s best to go in eyes wide open with all the facts

A home loan is one of the most serious investments a person can make.

While online rate comparison tools have made looking for a loan easier than ever, it still takes time to work out what the best option is for you. Here are five expert tips to ensure you are on track.

1. Know what you can afford

Interest rates may be low at the moment, but will you still be able to afford the repayments once they begin to rise?

The interest rate is by far the biggest cost of a home loan. As a rule of thumb, an interest rate difference of 1% will increase the annual cost of servicing a typical $300,000 loan by around $2,000.

Kirsty Lamont, a director at mortgage comparison website Mozo.com.au, says that when you’re calculating how much to borrow, don’t use current interest rates.

“Consider what will happen down the track when interest rates go up 1% or 2% percentage points or more,” says Lamont.

“Do your calculations by including a buffer to make sure you can still afford to maintain your repayments if rates do rise a couple of percentage points.”

2. Do your research

Finding the best home loan can often come down to making sure you do your research on the options available and choosing wisely, says Lamont.

Picking the wrong home loan could cost you tens of thousands of dollars in extra interest and fee charges. The home loan experts at Mozo have crunched the numbers and found that on a typical $300,000 home loan, the difference between the cheapest and most expensive home loans on the market adds up to over $4,000 each year in extra costs. Over 10 years that totals a whopping $40,000.

“These days it’s easy to research home loans online and with comparison sites like Mozo you can literally compare the market at the click of a button so use technology to your advantage,” she says.

3. Consider your individual circumstances

While you’re conducting research, make sure you consider your individual circumstances, says Steve Jovcevski, a property investment expert and home loan negotiator with Mozo.com.au.

Consider whether you would like an interest only loan, or a principal and interest loan.

“If you want an interest only loan where you make interest only payments at a low rate, make sure the loan-to-value ratio covers off that rate,” says Jovcevski.

4. Understand comparison rates

Borrowers need to check their loan is competitive on the fee front. The average upfront fee you will pay is $500, but some of the best value loans on the market have no application fees at all.

It’s also becoming more common for lenders to waive the application fee if you put pressure on them.

The comparison rate is a government-mandated calculation that includes the interest as well as the loan’s main fees and charges in the one rate and hence more accurately reflects the true cost of a mortgage.

“If you’re searching for something as important as a mortgage, and a comparison rate gives you a chance to level the playing field, you really must pay attention,” says Mark Bouris, executive chairman of wealth management company Yellow Brick Road.

“Because all lenders have to use the same formula, the result gives a borrower the means to compare the true cost of a loan before they commit to it, and it gives some reality to the headline interest rate.”

5. There’s a lot more than the Big Four

The big banks and other major lenders commonly charge annual ‘package’ fees of between $200 and $400 a year for a discounted home loan package.

These sorts of packages can offer substantial discounts on the lender’s standard interest rates, particularly if you’re borrowing a large amount, but it always pays to compare package deals against the top low-rate loans from smaller lenders like loans.com.au and uBank to see if you can get a comparable rate without the hefty annual package fees.

For information on property loans, rates and more, visit Mozo.com.au or click here for the free Property Observer eBook, Get loan-savvy – tips for a first time, investment or refinancing loan, which helps you decide on a home loan that meets your requirements.