Buying your first home can be one of life’s most exciting moments. But it’s also a major financial decision that will impact your household budget for years to come. Understanding the basics of home loans can help you compare deals from multiple lenders and pick an affordable home loan with features that are right for you.
Getting started on your home loan journey?
Finding your first home loan shouldn’t be complicated. Several online and offline resources can help you research and compare home loans to find the right one. The experience of your family and friends can also guide you, but you should remember that your financial situation may not be the same as anybody else.
Only you are aware of your unique requirements, and it helps to carry out independent research to choose a home loan that fits your budget and allows you to achieve your financial goals. Here are some basic factors you should compare while shopping for home loans to ensure you make the right choice when buying your first home.
1. Fixed rate home loan vs variable rate home loan
Choosing a fixed rate mortgage means the interest you are charged on the loan is locked in for a set period – usually between one and five years. This can give you the peace of mind that your home loan repayments will not change for some time.
However, once the loan’s fixed period ends, your lender will move you to a standard variable rate unless you fix the interest rate again. This rate may be higher than the fixed rate you were paying, which might strain your household budget if you don’t plan ahead.
A variable rate mortgage is one where the interest rate can change throughout the loan term. Variable mortgage rates generally follow the official cash rate, which means your repayments can fluctuate when you choose this option. Such loans are advantageous when rates are falling but can cost you more in the reverse scenario. It’s thus important to have some flexibility in your budget when choosing this option.
2. The interest rate and other charges on your home loan
The interest rate charged to you on your amount owing is a critical factor impacting the cost of the loan. But did you know the lowest interest rate you can find may not be the cheapest after all?
Lenders charge you several fees on top of the interest rate you pay. Besides the interest rate, you should check a loan’s comparison rate to understand its actual cost. The comparison rate is calculated by considering both the interest rate and some of the standard fees charged by lenders – helping you compare apples with apples when searching for home loan deals. However, remember that comparison rates are generally calculated for a $150,000 home loan and may not be a 100% accurate representation of what a loan will cost you.
3. Honeymoon rates
Lenders sometimes offer discounted rates to first home buyers, also known as honeymoon rates. A honeymoon rate typically lasts for a year, and you’ll benefit from lower costs in this period, which can help you better manage your household budget. However, you’ll start paying the standard variable rate charged by your lender at the end of the honeymoon period, which is likely to be higher than the honeymoon rate. It’s important to keep this possible jump in your repayments in mind while budgeting for your home loan.
4. Home loan features
Some loans offer helpful features like an offset account, redraw facility, repayment holiday, and the ability to make extra repayments for free. Such features can make it easier for you to manage your home loan and save some of the interest you pay on your mortgage. Unfortunately, most good things come with a price tag, and your lender may charge you a fee for accessing these features.
To avoid paying extra, you should weigh the potential benefits of each of these features vis-à-vis their cost to decide whether you need any bells and whistles in your loan. You may also speak with a mortgage broker to understand more about the home loan features available to you and how they can help you.
5. Government assistance
If you are a first home buyer, you may qualify for one of the several first home buyer assistance schemes funded by the government. These include the First Home Owner Grant, the First Home Guarantee, and the Family Home Guarantee scheme. Some states also offer stamp duty exemptions or concessions to first home buyers, which could save a significant amount of money.
Comparing home loans and checking for any available discounts can help you save thousands over the life of the loan. Besides these basic home loan factors, you may also want to check if you qualify for any professional discounts, which are generally available to doctors and some other professionals. If you need guidance, a mortgage broker can provide personalised advice to help you find a home loan tailored for you.
