Thinking of buying a home?
Home – where foundations are set, families are built, stories begin and memories live on. It’s what many of us dream of – a comfortable place to call our own.
Sentimentality aside, a home is also probably the MOST EXPENSIVE thing you’ll ever buy. At a median value of around $516,713 (CoreLogic, June 2019), dwellings in Australia require a fair chunk of dough to be cooked up by the everyday punter. A quick browse of some property listings on different real estate apps will attest to that. So unless you’re flooded with cash, most of the funds will need to be borrowed through a home loan (otherwise referred to as a mortgage).
Median Dwelling Prices Around Australia
Source: CoreLogic Hedonic Home Value Index, June 2020 Results
Repaying this home loan can feel like ‘forced savings’, with money put towards the home as ‘equity’ to solidify it as the bedrock of your household’s finances. In that sense, paying off your property – an asset which can grow in value – could be seen as an ‘investment’ rather than a ‘cost’. But a scoop of your repayments are fed to the lender in interest. Over the life of the loan, this interest can knock you for six in cost figures.
How can you save money on a home loan?
To know how to save on a home loan, you need to identify where the costs are coming from. Essentially, you’ve got two main sources:
Interest rate: The ultimate money-muncher, interest makes up the majority of the home loan’s total cost.
Fees: While not as significant as interest costs, the upfront and ongoing fees of a home loan can stack up in the thousands. These home loan fees can include application fees, discharge fees, lenders mortgage insurance premiums and annual fees
Luckily, Australia’s competitive home loan market provides Aussie borrowers with ample opportunities to save on these costs by simply comparing home loans to find some of the best value deals. Whether you’re looking to save on a new home loan or an existing one, there are market-leading products available in today’s low-rate environment with comparison rates of under 4.00% p.a. Every basis point (0.01) of difference between rates could save thousands off the total cost of your home loan.
While securing a great deal on a home loan is the crucial part of the equation, there still are other things you can do to save money on your home loan, such as:
Not only can these methods reduce costs, but they may also help you pay off the loan earlier, granting you more years of debt-free freedom.
Popular home loan features
Offset accounts are like savings accounts where the money stored in the account is offset against the balance of your home loan when interest is charged. This means you’re not charged interest on the full actual balance of your loan, saving you in interest costs. Offset accounts can be full (100%) or partial offset. On a full offset account, 100% of the funds in the account are deducted from the outstanding loan balance when interest is calculated. For instance, if you have a $200,000 mortgage and $20,000 on the offset account, you will only be charged interest on $180,000 each month. For a partial offset account, only some of the offset account balance is deducted from the outstanding loan balance. So assuming the same amounts from the previous example, a 50% partial offset account would charge interest on $190,000 each month.
A redraw facility allows borrowers to make extra repayments on their home loan which they can ‘redraw’ later if required. It allows you to be flexible when repaying your loan. This is particularly useful if you have savings now that you want to put towards your loan, but you know that have an expense coming up in the future where that cash is required. Sounds similar to an offset account, doesn’t it? The main difference between redraw facilities and offset accounts is the availability of the funds. Money in an offset account can usually be withdrawn at any time (offset accounts sometimes come with an EFTPOS card to allow this), whereas redraw facilities often do not provide same-day withdrawal.
Taking out a home loan: 4 key tips
1. Compare home loan rates and lenders
Comparison is key to making the right choice of home loan. Compare everything from the different types of home loans, lenders, home loan rates and fees. A thorough home loan comparison can give you a huge advantage in the mission to land a great value mortgage that satisfies your requirements.
2. Get your financial documents in order
When it comes to applying for a home loan, you will need to provide the lender with a number of different financial documents. Having these documents prepared will shorten the application period.
So, do your research and find out what exactly are you expected to bring. Bank accounts, brokerage statements, payslips – having these ready beforehand them can save you a lot of trouble.
3. Borrow only what you know you can afford to repay
It goes without saying that it is only advisable to borrow as much as you know you can afford to repay. It might seem obvious, but many Australians make a fatal mistake when it comes to this, leading to years of ‘mortgage stress’. Just because a lender is willing to lend you up to a maximum amount does not mean you should borrow at that max. So be realistic. Know exactly what you can afford and do not compromise your home by borrowing more than that! Use a mortgage repayment calculator to help you estimate what your monthly repayments will be.
4. Don’t be afraid to ask for help
It is okay to be confused. So, if you don’t know exactly which loan features are right for your particular circumstances, be as clear as possible with your lender or mortgage broker when discussing what you’re trying to achieve, to allow them to help match you to the right loan to meet your needs. These people deal with lending every day, so do not be afraid to talk to them and ask them for help. Most of the time, apart from advising you, they will be more than willing to assist you in preparing and submitting all the paperwork.
Don’t rush into the decision, take your time, do a thorough lender and home loan interest rate comparison, ask around, get your financial documents in order and ask for help if needed! This decision would probably be one of the most important ones in your life, so do not take it lightly!
Frequently asked questions
1. How much deposit is required for a home loan?
The amount needed for a house deposit varies, but you'll usually need at least 5% of the property's value, which is an LVR (loan-to-value ratio) of 95%.
To avoid paying Lenders Mortgage Insurance (LMI) however, most lenders will require you to provide a deposit of 20% of the property's value.
2. What happens if I default on my home loan?
A mortgage default (missing a repayment by 90 days) won't bankrupt you but will require you to pay a late fee up to $200. This might seem relatively minor, but defaulting on your mortgage will also be recorded on your credit file, thus damaging your credit score.
Plus, missing a month or two of repayments will also increase the length of your home loan, which leads to greater interest charges over time.
3. What are the requirements for a home loan?
Applying for a home loan can be a lengthy process, but you can speed it up by knowing what you'll need:
- A house deposit (at least 5%)
- A credit history (a good score will improve your chances)
- A stable income (the higher the better)
- A lack of debts
- Photo ID (driver's license, passport etc.)
- Bank statements and payslips
- Council rates for any other properties you own
- Other documents such as the First Home Owner Grant
4. What is the home loan process?
The home loan application process can be quite lengthy but isn't too complicated. It will generally involve the following steps:
- Save for a deposit (the hard part)
- Find your perfect home or getting pre-approval first
- Gather your required documents
- Compare home loan providers
- A preliminary assessment by the lender
- Submit your application to the lender
- The lender completes a property valuation
- The lender approves or rejects the loan
- They send you an offer
- The loan is settled and the funds are advanced to you.
Read our home buying checklist for a complete breakdown of everything you need to know.