When looking for a good deal on a home loan (mortgage), the interest rate matters. A home loan is a long-term debt, so even a small difference in interest adds up over time.
Home loans come with different options and features. These can offer flexibility or let you pay off your loan faster. Some options could cost you more, so make sure they’re worth it.
Principal and interest will pay off the loan
Principal and interest loans
Most people get this type of home loan. You make regular repayments on the amount borrowed (the principal), plus, you pay interest on that amount. You pay off the loan over an agreed period of time (loan term), for example, 25 or 30 years.
Interest-only loans
For an initial period (for example, five years), your repayments only cover interest on
the amount borrowed. You aren’t paying off the principal you borrowed, so your debt isn’t reduced. Repayments may be lower during the interest-only period, but they will go up after that. Make sure you can afford them.
Get the shortest loan term you can afford
Your loan term is how long you have to pay off the loan. It impacts the size of your mortgage repayments and how much interest you’ll pay.
A shorter loan term (for example, 20 years) means higher repayments, but you’ll pay
less in interest.
A longer loan term (for example, 30 years) means lower repayments, but you’ll pay
more in interest.
Aim for the lowest interest rate
An interest rate even 0.5% lower could save you thousands of dollars over time.
Check the average interest rate
Choose your loan and repayment types to see the average interest rate for new home loans in September 2021
Weigh up the pros and cons of fixed and variable interest rates to decide which suits
you.
Fixed interest rate
A fixed interest rate stays the same for a set period (for example, five years). The rate then goes to a variable interest rate , or you can negotiate another fixed rate.
Pros:
- More loan features may offer you greater flexibility.
- It’s usually easier to switch loans later, if you find a better deal.
Cons:
- Makes budgeting harder as your repayments could go up or down.
- More loan features could cost you more.
Partially-fixed rate
If you’re not sure whether a fixed or variable interest rate is right for you, consider a
bit of both. With a partially-fixed rate (split loan), a portion of your loan has a fixed rate and the rest has a variable rate. You can decide how to split the loan (for example, 50/50 or 20/80).
Mortgage features come at a cost
Home loans with more options or features can come at a higher cost. These could include an offset account, redraw or line of credit facilities. Most are ways of putting extra money into your loan to reduce the amount of interest you pay.
Weigh up if features are worth it
For example, suppose you are considering a $500,000 loan with an offset account. If
you’re able to keep $20,000 of savings in the offset, you’ll pay interest on $480,000. But if your offset balance will always be low (for example under $10,000), it may not be worth paying for this feature.
Avoid paying more for ‘nice-to-have’ options
When comparing loans, consider your lifestyle and what options you really need.
What features are ‘must-haves’? What are ‘nice-to-haves’? Is it worth paying extra for features you may never use? You may be better off choosing a basic loan with limited features.