At first glance, a home loan can look like a confusing jumble of numbers and unfamiliar terms. How do you identify a competitive, quality home loan? How do you know when you've found the right home loan for you?
Here's the secret: home loans aren't as complicated as you think they are. Understanding the interest rate and a few key features make it much easier to assess home loans and to make a better decision.
The interest rate.
Always start with the interest rate. This is the rate at which your lender charges interest on top of the principal of your loan (how much you've borrowed). A lower rate means smaller monthly repayments.
Some loans have variable interest rates which can change over time. Others are fixed, which means your rate won't change for a set number of years.
There are two ways to repay your home loan. Most borrowers make principal and interest repayments, where they repay the principal and the interest together. Your monthly repayments can be heavy, but you're repaying your debt from day one.
Interest-only repayments allow you to just repay interest charges at the beginning of the loan. These repayments are much smaller, but the catch is you will need to pay off the principal later and it will cost you more in the long run.
If you have the money to make extra repayments on your home loan, for example if your salary increases or you come into some extra cash, you will get out of debt faster and pay less interest.
But some home loans, especially fixed-rate products, charge a fee for early repayments. It's worth checking into this when looking at home loans.
An offset account.
An offset account functions like a savings account attached to your home loan. The money in it is yours and you can save or spend it as you like. But as long as the money is sitting there, it offsets the principal on your home loan.
In other words, if you put $20,000 in your offset account, it essentially looks like you've paid an extra $20,000 off your loan principal. This means you pay less interest. If you kept that $20,000 in the offset account, you'd actually end up paying off your home loan faster.
You can spend the money when you need it, but then your principal will go back to the full amount, meaning your interest repayments will go up again.
Loan-to-value ratio (LVR).
This is a confusing industry term that really just means minimum deposit. It's how much you need to have saved as a deposit compared to the value of the property you're buying.
Home loans generally have 80% LVRs. You can borrow 80% of a property's value and so you need to save a 20% deposit. If the house you're buying costs $500,000, you will need a $100,000 deposit.
But some home loans let you borrow up to 95% of a property's value. These loans have the same maximum LVR, but they have a maximum insured LVR of 95%.
What's the difference? Well, whenever you borrow more than 80% of a property's value, you need to pay lenders mortgage insurance. This can cost you several thousand dollars or more, depending on your deposit size and the price of your property.
But if you've only got a 5% deposit, a high LVR means you can get a home loan sooner rather than later.
If you're likely to sell your home and move before you pay off the home loan, then loan portability is very helpful. This feature means your home loan simply carries over to your new property without the need to refinance and thus re-apply for a whole new home loan. Unfortunately Tic:Toc doesn't offer loan portability, which is a convenient feature to have when you're more focused on moving day than on home loan paperwork. However, having an automated assessment and approval process means Tic:Toc takes the paperwork and hassle out of switching loans anyway!
Richard Whitten is the Home Loans Editor at finder.com.au