Important questions to ask before choosing a home loan
When applying for a home loan, there is a lot more to consider than just the interest rate. Borrowers need to remember that they are in the driver's seat.
You need to dig a little deeper and ask the important questions to find the best deal for your situation.
Below are some important questions you should ask lenders when you are comparing home loans.
1. What is the comparison rate?
Although using the interest rate to compare loans is a good starting point, it is important for borrowers to look at the comparison rate as well. Unlike the interest rate, the comparison rate includes the fees and charges related to the loan, such as applications fees, monthly account keeping fees and annual fees. Note: comparison rates are based on a $150,000 loan over a 25-year loan period. To get a better idea of the actual comparison rate for the loan you are looking for, ask for a Key Facts Sheet. This will contain a personalised comparison rate which is tailored to your loan amount and loan term. Use this to compare different loans and lenders.
2. Is this the best rate you can give me?
As mentioned above, you are in the driver's seat. As the mortgage industry is competitive, you have the opportunity to negotiate with the lenders about the interest rate being offered. Interest rates can vary according to the Loan to Value Ratio (LVR), which is the loan divided by the value of the property. The best rates are often reserved for those borrowing less than 80% of the value of the property or large loan amounts, say over $500k. If you fit this criteria you will be in the best position to negotiate. Some loans have annual fees and some don't. Get the lender to help crunch the numbers on which one will save you the most over the life of the loan.
3. What features are available?
Some borrowers overlook the features when applying for a home loan, but these extras can potentially save you a lot of money throughout the life of the home loan. Some examples include free redraw, an offset account, direct salary crediting and bonus rate drop. However, some lenders may charge fees on some extras, so it is important to check before deciding on a loan.
4. What type of repayments can I make?
Most lenders offer either monthly, fortnightly or weekly repayments. However, it is worth checking with the lender to see which ones are available in case you wish to change the repayment frequency down the track. Is there the option to change your repayment type from principle and interest to interest only? If things get tight, like if you start a family, you may wish to just make the interest repayments for a period to give yourself a bit of extra breathing space.
5. What documents do I need to provide?
In order to process your loan application quickly and successfully, the more information you have, the better. There is a list of requirements lenders need before they can process your loan application, so if you enquire about these documents at the beginning, you will be organised and prepared when you submit your application.
6. What is the deposit amount required?
Lenders differ as to how much they will lend, relative to the value of the property. This will affect the deposit amount you will need to save. For example, if the lender is willing to lend over 90% of the purchase price of the property, it means that your deposit will be 10% or less of the purchase price. However, there are other costs involved like stamp duty, conveyancers costs, government transfers and lenders mortgage insurance (discussed below). Get estimates on all costs so you know what your savings will cover. Crunching the numbers on this can be difficult. Get the lender to factor in all costs so you know exactly what savings amount will be needed.
7. Will I need to pay Lenders Mortgage Insurance?
Lenders Mortgage Insurance (LMI) covers the lender if you default on a repayment. Usually, if you are borrowing above 80% of the value of the property, you will be required to pay for this insurance. Normally it is added to the loan and can amount to thousands of dollars. However, every lender is different, which is why it is important to speak with the lender beforehand.