There are hundreds of home loan products available on the market. Therefore, the sheer number of choices makes comparing home loans from different banks confusing even for the most seasoned of home buyers. So, if you’re new to the market or haven’t bought a home for some time, then wading your way through the mountain of choices can be tricky.
Many people will say that comparing home loans from different banks is difficult. In fact, some will even leave comparisons to a mortgage broker because they don’t like the idea of having to do this themselves. So, why don’t they like making comparisons? Here’s the deal:
- Lenders can have the same loan types. But, they have varying lending criteria, which may make these loans unobtainable or only offered to certain people at various times.
- Not all lenders are the same. One lender may be much easier to deal with than another lender who has the same loan type.
- Some lenders also have unique home loan features. While lenders have the same loan types, they can offer very different features such as online banking and customer service not found elsewhere.
Overall, these aspects, and many others make comparing home loans harder. However, there is an easy way to compare loans. Let’s look at this now.
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The best way to comparing home loans from different banks is to ask for the ‘Key Fact Sheet’. Required by law, these sheets tell a prospective borrower everything they need to know about a home loan product. As such, they list the:
- Loan amount.
- Loan term.
- Lender and home loan product name.
- Home loan interest rate.
- Comparison rate.
- Repayment frequency.
- Loan type.
- Total cost of the home loan per month, annually and over the loan term.
- Amount you’ll pay back for every dollar paid.
- Fees associated with the loan.
- Costs if interest rates increase.
- Ways you can repay your loan faster.
If you’re searching for the best rate that gives you all the features you want, then using a Key Fact Sheet is the way to go. You can contact the loan lender and ask them to email you one.
Below is an example of a Key Fact Sheet created on the MyState website. The loan used here is the Basic Variable Residential Home Loan (LVR <=80%). The loan amount is $400,000 over a 30 year loan term, with a variable interest rate.
What happens next?
So, you’ve downloaded the Key Fact Sheets for a selection of home loans you like. Now: let’s look at how to use the sheets and combine this information with online research to find the right loan for you.
Even if you like loans that are very different from each other, you can still carry out a comparison. How? Well, using the Key Fact Sheets and any additional information gathered about the loan from your online research you can focus on specific points, such as:
- Rates – the type of interest and rate (advertised and comparison).
- Loan fees – what are the application and ongoing charges?
- The loan features – does the loan come with a redraw, offset or account linking facility?
- Repayments – can you pay off more?
- The loan-to-value-ratio (LVR) – what is the LVR?
- Terms – what is the loan duration?
- Interest rate type – does the loan have a variable, fixed or split rate?
These factors help to narrow down your selection. Once you’ve found a handful of loans you like, then draw yourself up a table so comparing home loans is quick and allows you to make a final decision just by glancing at the facts. Your table should look like the following:
|Loan Details||Bank of Sydney Variable||St. George Basic Home Loan|
|Interest Rate (advertised)||3.63%||3.64%|
|Loan Features||Redraw + Offset||Redraw|
|Loan Term||30 years||30 years|
|Interest Rate Type||Variable||Variable|
Information and interest rates are current as at 20th December 2017 and subject to change.
We’ve compared two home loans here. But, you can compare as many as you like. The idea is to present the facts, so they are easy-to-see and review. Thus, you can make a choice without too much difficulty. That’s providing you understand the terminology. If you don’t, then we can help you there as well. Start comparing home loans today.
Another problem that many people encounter when comparing home loans is they find it difficult to understand the lingo. Sure, it’s okay if you work in the banking sector or you buy and sell property regularly. But, if you don’t, then terms like ‘offset account’ and ‘comparison rate’ are difficult to understand. So, let’s break down these terms for you now, so you know exactly what each one means.
What is the Advertised Interest Rate?
The advertised interest rate, published with a loan, is also known as the nominal interest rate. This rate is the loan’s price tag, so you know how much it’s going to cost. A lender then uses this rate to calculate your interest monthly. For instance, if a lender advertises 4.45% on a variable loan, then this is the rate charged, unless, of course, rates rise.
What’s a Comparison Rate?
A comparison rate is the advertised interest rate, plus any fees. By law, a lender must advise a borrower what the comparison rate is, as this then allows the prospective borrower to ‘compare’ a lender’s product with other products on the market.
How Do an Offset and Redraw Facility Work?
An offset account and redraw facility work to reduce the interest that you pay on your home loan monthly. Want to know the best part? Both work in different ways. Firstly, an offset account is a savings account linked to your mortgage. The balance in this account reduces your mortgage principal daily, which, in turn, reduces the amount of interest that you pay. For instance, if you had $56,000 in your bank account and you owed $200,000 on your home, then you’d only be paying interest on $144,000. A redraw facility, on the other hand, allows you to pay more off your home loan. It gets better: you can then redraw any of the excess funds that you’ve paid into the account at a later date. So, your mortgage is a little like a savings account.
What is the Maximum LVR?
The loan-to-value ratio or LVR is a term that lenders use to express the value of an asset in comparison to its loan. To calculate your LVR divide your mortgage or the amount you wish to borrow by the home’s appraised value, then times this by 100 to express this as a percentage. For instance, a home valued at $750,000 that has a loan of $250,000 has an LVR of 33.33%. The ideal LVR is below 80%, as this allows you to avoid paying Lender’s Mortgage Insurance, which can add thousands to the cost of your mortgage.
How Does Rate Lock Work?
This is crazy: rate lock secures your interest rate while you wait for your application approval to come through. For example, let’s say you apply for a loan on a Thursday with an interest rate of 3.89% on a fixed term loan of 5-years. Then, on Monday, the following week, your lender decides to shift rates up by .20 of a percent. But here’s the kicker: if you don’t have a rate lock in place, then your interest rate will jump to 4.09%. However, if you have rate lock, then your interest rate will remain the same.
What is Home Loan Pre-Approval?
Home loan pre-approval is when you apply for a mortgage, but need to find a property. To gain pre-approval, a lender checks your credit history and financial information and then verifies what you can afford to borrow. They will then pre-approve a specific loan amount for a specified time – usually 3 to 6 months. Over this time, you will need to find a home. Once you find a home you want to buy a lender will then need to value the property, and if it meets their criteria, your loan will then be fully approved.