How to compare home loans: Finding the right mortgage

Buying a home is one of the biggest decisions a person will make in their life. It’s no wonder, then, that most buyers spend weeks, or even months, contemplating the type of property they wish to buy, the suburbs that best suit them, and how much they want to spend to secure their dream pad. 

However, comparing home loan products is perhaps just as important as comparing kitchen splashbacks and neighbourhoods. Not to mention, the mortgage with the lowest interest rate won’t necessarily be the best choice for you, your family, and your financial health. 

Comparing and contrasting all that’s available on the mortgage market could save you thousands of dollars and quite a few headaches. Let us walk you through the process of finding, evaluating, and selecting the perfect home loan for your needs, as well as the secret weapon against sneaky lenders (hint: It’s the comparison rate).

How do you start comparing home loans?

It’s essential that you find a home loan product that fits you and your lifestyle. After all, those signing on to a mortgage today typically expect to be making home loan repayments for decades to come. 

Fortunately, there are plenty of ways to find and compare home loans to find the best choice for you. 

Perhaps the simplest method is using a home loan comparison service such as that offered by Savings.com.au. It’s also common for soon-to-be-homeowners to turn to a mortgage broker for help.

But no matter how you choose to compare home loans, it’s invaluable to know the ins and outs of a mortgage to figure out what features will best suit you. 

What to consider when comparing home loans

So, what should a person evaluating home loans look for in a mortgage product? The key factors that will differ between home loans can be broken down into three categories: Features, fees, and rates.

Let’s go from the top. 

What features do you want in a home loan?

Seen one home loan, seen them all? Think again. Different home loan products will offer different features in various combinations, and would-be borrowers would be wise to consider which features are unnecessary for them and which are non-negotiables.

Take offset accounts, for instance. Money stored in an offset account is ‘offset’ against the balance of a mortgage, saving a borrower interest. But, as home loans with offset accounts typically have higher interest rates and fees, it’s important to consider whether the higher costs are worth it. 

Other potential home loan features include:

• The ability to make extra repayments
• The option to redraw those repayments when needed (redraw facilities)
• Split interest rate capability (allowing only part of a home loans interest rate to be fixed)
• The potential to take repayment holidays
• Access to line-of-credit facilities
• & many more…

Figuring out what all the above features actually do and how they could help you manage your finances and build your equity might take time, but will be well worthwhile in the years to come.

Don’t forget to consider mortgage fees

Next, those hunting for a home loan should take into account the various fees that lenders can, and often do, charge on top of interest.

Things like application fees, mortgage registration fees, and lenders mortgage insurance (LMI) can add up fast. 

Not to mention, some home loan lenders demand borrowers pay ongoing fees, such as monthly service fees, annual fees, and late payment fees.

Many such fees are factored into a home loan’s comparison rate – more on that in a moment.

Interest

The third major factor to consider when comparing home loans is the interest rate. But more important than selecting the lowest rate available to you, is deciding what type of interest rate you need: Fixed or variable (or both).

Let’s break down when it means to have a fixed interest rate home loan: 

• Repayments on a fixed-rate home loan will remain the same for a set period – often between one and five years

• Those with fixed interest rates typically can’t make many extra repayments

• Fixed-rate home loans often don’t allow for offset accounts or redraw facilities 

And here is what you need to know about variable interest rate home loans:

• If you have a variable-rate home loan, your interest rate, and therefore your repayments, can rise and fall over time 
• Variable-rate home loans will generally allow a borrower to make as many extra repayments as they’d like
• They also typically offer many features that often aren’t found on fixed-rate home loans, like offset accounts

Some mortgage products allow for a ‘split rate’, meaning the interest rate on a portion of a home loan is fixed and that of another portion is variable, potentially offering a borrower the best of both worlds.

It’s also important to decide whether you want to make principal and interest repayments or interest-only repayments.

For the most part, people taking out a home loan probably do so in hopes of paying the principal (that is, the borrowed funds or the ‘balance’) back over time. If that’s the case, you’ll likely want to make principal and interest repayments. 

Interest-only repayments, on the other hand, won’t see a person paying back the money they borrow for an agreed period of time. Though, they’ll continue paying interest over those years. Interest-only repayments are commonly the domain of property investors. 

How do you evaluate home loan costs and interest rates?

Of course, comparing home loans also means comparing costs. The first thing that’s worth considering when contemplating the costs associated with a particular home loan product is the interest rate. 

Compare and contrast home loan interest rates

After deciding whether you’re after a fixed rate or a variable rate and choosing the features you want your home loan to offer, the most important thing to consider is a mortgage’s interest rate.

It’s worth remembering that the interest rate advertised by a lender might not be the interest rate you ultimately walk away with. Lenders take many factors into consideration when deciding how much interest to charge a borrower, including the size of their deposit, the size of their loan, their credit history, and whether they will live in their home or rent it out.

In most cases, a borrower would do well to secure the lowest-rate loan available to them that offers all their must-have features. The lower the rate, the less interest they’ll pay over their loan’s life. 

Take two borrowers for example, one with a 3% interest rate and another with a 7% interest rate, each taking out a $500,000 home loan with a lifespan of 30 years.

According to Savings.com.au’s Mortgage Repayment Calculator, the borrower with a 3% interest rate will face repayments of $2,108.02 a month.

Meanwhile, their peer with a 7% interest rate will fork out $2,993.86 each month on repayments – an additional $885. That adds up to more than $10,000 each year!

Of course, those with a variable rate will probably see their interest rate shift and change as the years go on. On the other hand, borrowers set on a fixed rate will still have to renegotiate their interest rate at the end of each fixed rate period.

But the interest rate a bank or lender offers might not be all it’s cracked up to be. In fact, a borrower’s secret weapon when choosing a home loan might be its comparison rate. 

Pay particularly close attention to the comparison rate

A home loan’s comparison rate offers a means to assess its true cost with very little legwork. It’s arguably the more important figure to pay attention to when choosing the best home loan for your needs. 

A home loan’s comparison rate essentially combines the interest rate on offer with the fees and charges a bank or lender demands borrowers pay. That way, lenders can’t sneak exorbitant costs into a home loan under the guise of a low rate. 

However, it’s important to bear in mind that comparison rates have to uniformly represent the overall cost of a $150,000 mortgage spread over 25 years. It’s the law. 

For that reason, the comparison rate won’t accurately represent the costs accumulated by any and all borrowers. Still, it could help you recognise if one home loan product comes with multiple sneaky fees while another, with a slightly higher interest rate, doesn’t.