Did you know that three in every ten households feel the pinch from mortgage stress? The Bureau of Statistics provided this grim figure to Fairfax back in 2012, and last year they also reported a 25-year high for household debt.
Buying a house – your dream home where you’re going to grow your family and your future – needn’t be a stressful experience. Realistically, comparing home loan rates, calculating home loan repayments and finding a mortgage broker can be a confusing process.
But when you’re empowered with the right knowledge to secure your family’s dream home, you’ll make the home buying process smoother and less headline-worthy.
The top 5 things banks won’t tell you about home loans
Loan approvals: one size fits all is a load of BS
Banks – they’re all the same, right? Except they’re not. While their products and commissions will be similar, the way banks approve a home loan differs from bank to bank.
There’s a whole list of lending criteria each bank will have, but here are some of the things that can be quite different:
- Some don’t mind if you’re still within your probation period, while others can be a bit iffy. Some require two years tax returns for self-employed, others will just ask for one. Some consider maternity leave, others won’t.
- Lenders are more likely to approve home loan applications for people who can demonstrate a long-term financial commitment. Some will be more flexible and consider your rental history.
- Credit scores. Some will approve home loans with bad credit, while others will politely give you advice on how to best improve your situation before applying…which could be a while. Some bank computers will even automatically decline your loan before a person can even make a judgement call on it.
Give introductory rates the finger
So you’ve found a happy and helpful mortgage broker or bank, and they’ve found you a really great deal on a home loan. The interest rate is jaw-droppingly low and you can just see yourself high-fiving your partner every month for making mortgage repayment such a breeze. Ba-booooom. Wrong! Introductory rates are the red herrings of the home loan world. What usually happens is that you’re seduced by a super low rate in the first year, and then it steadily increases the year after. You actually end up paying more. If it’s too good to be true, it is.
Fees are not always the enemy
Yuck. Bank fees! Just typing that makes the hair on my neck stand on end.
But in all honesty, a loan with an annual or monthly might offer a lower interest rate, which works out better in the long-term.
Consider, ME Bank’s Flexible Home Loan product. The current variable rate is 4.88% with no annual fees or 4.68% with a $395 per year package fee. The lower interest rate saves you more than the fee if your loan is bigger than $275,000 – which they usually are! And this doesn’t even take into account the other advantages of taking a package.
Don’t disregard home loans with bank fees – you might be better off in the long-term for it.
Home Loan Comparison Rates are mandatory…but not entirely helpful
A home loan comparison rate is a tool used to help homebuyers figure out the long-term cost of a home loan, including everything else in the home buying cost equation. Here’s an example of where you might see one:
The Australian Government makes it mandatory to display a comparison rate for every advertised credit rate. They were introduced to reflect the true cost of a home, but that doesn’t mean you should rely on them.
To put it simply, a comparison rate considers the home loan amount, length of the home loan, repayment frequency, your interest rate, and all other one-off and ongoing fees and charges connected with the loan. It then adds them all together, and represents the cost as a single percentage figure to reflect how much money you’ll really pay every year.
Buuut… a comparison rate is based on a ‘standard’ loan of $150,000 over 25 years. Personally, I have never helped homebuyers find approval for a home loan amount that small. My father might have… in the 70s. The problem is, this skews the impact of fees.
Consider the above ME Bank scenario where we talk about annual fees. Look at how the comparison rate changes for the bigger loan size!
|Product||Comparison Rate @ $150,000||Comparison Rate @ $300,000||Comparison Rate @ $500,000|
|Flexible with no ongoing fee||4.89%||4.89%||4.89%|
|Flexible with $395 ongoing fee||5.07%||4.87%||4.79%|
You can break up with your bank
Breaking up is hard to do. But when it comes to your bank, the best thing to explain is it’s not you…it’s them. Just because you’ve signed on the bottom line, doesn’t mean you’ll have to spend the next 30-years in financial matrimony with a home loan that’s more stressful than your partner’s snoring. It’s possible to review your situation and jump ship! Viva la liberta! Focus on the next three-to-five years instead, and plan for a review. Also, know what fees and charges apply for switching home loan lenders.
Not sure how to refinance your home loan? Ask the team at Mortgage Guy – we’ll talk to you for free!
Of course, there’s a lot more to understanding home loans, interest rates and buying a home for your family. And the more you know, the better.
Stay tuned for our next post, where we’ll be discussing all you need to know about credit scores.