Home loan comparison

A home loan is a significant sum of money that you borrow from a bank or other lender to purchase property.

As the borrower, you offer up the home as "security" or "collateral" for the loan, giving the lender the right to repossess the property if you fail to repay the loan. In legal terms, this is known as "mortgaging" your home, which is why a home loan is sometimes called a mortgage.

When you borrow money to buy a home or investment property, you'll need to pay this money back in instalments over time, plus an extra charge from the lender called "interest".

The interest you're charged on each mortgage repayment is based on your remaining loan amount, also known as your loan principal. The rate at which interest is charged on your home loan principal is expressed as a percentage. Your home loan’s interest rate is effectively the cost of “buying” the money you use to purchase property. 

As home loans are secured by the value of the property, most lenders consider them less risky than most personal loans or business loans, so their interest rates are usually much lower.

When it comes to securing a home loan in Australia, there are various factors to take into account that extend beyond the funds borrowed for acquiring a property. Regardless of whether you're a first-time homebuyer, in the market for a new property, contemplating a loan refinance, or delving into real estate investment, it's crucial to grasp the diverse elements and expenses associated with the loan, which go beyond the initial loan sum.

Incorporating additional features and benefits into your home loan can enhance its value. However, it's important to note that the more features and extras a home loan offers, the higher the likelihood of incurring elevated fees or interest rates. Sometimes, opting for a "no frills" home loan with a low interest rate and zero fees can be a more cost-effective option that aligns better with your requirements.

Buying a property often means paying for more than just the house itself. While your deposit plus your loan amount should cover the property’s purchase price, you’ll also need to have enough money saved to cover other upfront costs, such as: 

• Establishment fees
• Lenders mortgage insurance (LMI)
• Stamp duty
• Conveyancing or valuation fees

These costs can vary, and you can use online calculators to estimate how much extra you may need to budget for.

While the exact amount you can be pre-approved for will depend on your financial situation and the lender’s policies, a borrowing power calculator can provide an estimated loan amount that you may be approved for. However, it’s not necessary to borrow the full amount.

Just because you have a higher borrowing capacity doesn’t mean you have to borrow the maximum loan amount. Instead, take a closer look at your finances to determine a loan size that you can comfortably repay. You can use a mortgage repayment calculator to work out your potential monthly repayments for various loan sizes. Understanding how much you can repay monthly could help you better estimate the loan amount you can comfortably afford.

Generally speaking, you’ll want to keep your mortgage and debt less than four to six times your household income (minus the deposit) to avoid mortgage stress and to boost your chances of approval. 

Most lenders prefer that a borrower pays an upfront deposit on a property of at least 20% of the purchase price, with the mortgage covering the remainder. That said, it may be possible to get a home loan with a deposit as little as 5%. However, you'll need to discuss these options with your preferred lender to see what options are available to you.

A larger upfront deposit and smaller loan amount may help to make your mortgage repayments more affordable, so you can pay off the property faster and pay less interest in total. But a bigger loan with a lesser deposit means you could spend less time saving and join the property market sooner. 

If your deposit is under 20%, you'll be required to pay Lender’s Mortgage Insurance (LMI), which could potentially add tens of thousands of dollars to your upfront costs. Calculating the costs of LMI can help you work out which home loans you might qualify for.

Both the state and federal governments offer a variety of grants and incentives to help home buyers, especially first home buyers. Most state and territory governments offer a First Home Owners Grant (FHOG) or similar incentives (such as discounted or waived stamp duty) to assist borrowers buying their first property.

The federal government’s Home Guarantee Scheme (HGS), previously known as the First Home Loan Deposit Scheme (FHLDS) is a program that allows borrowers to apply for a mortgage with a deposit of just 5% and pay no LMI, as the government will step in to guarantee the remainder of the deposit. 

Keep in mind that there are a limited number of places available in this program each financial year, and only a limited number of lenders are participating in the program. Also, both the borrower(s) and the property being bought will need to satisfy a number of terms and conditions to be eligible.

Another government program that may be useful to home buyers is the First Home Super Saver (FHSS) scheme. This allows borrowers to make extra contributions into their superannuation fund, where you can’t easily access your cash for everyday spending. These contributions can later be withdrawn from your super fund to help cover the cost of your deposit – up to $15,000 of voluntary contributions per financial year, up to a total of $30,0000 in contributions across all years.

Your home loan is one of the largest and most significant financial commitments of your life. Just as you wouldn't buy the first car you saw at a dealership, you should never apply for the first home loan you see.

It’s important to choose the home loan that best suits your lifestyle, financial needs and personal goals. Finding the best home loan involves more than just hunting for the lowest interest rates. Comparing loans and looking at the rates, fees, features and benefits of home loans from a variety of different banks and other mortgage lenders can help you work out which mortgage offers are the best for you, and not just the cheapest. 

Even after successfully taking out a home loan, it’s often a good idea to conduct home loan comparisons at regular intervals, to make sure that your mortgage still suits your needs. If you find another home loan with a lower interest rate or features and benefits that better suit your changing circumstances, you may have the option to refinance.  

As you get started on your home loan comparison, consider asking yourself the following questions:

1. Are you an owner-occupier or an investor?

The home loan you choose will be influenced by the type of borrower you are. As mentioned earlier, the two main types of borrowers in Australia are owner-occupiers and investors. 

Owner-occupied home loans often have lower interest rates than investment loans, as lenders consider owner-occupiers less likely to default on their repayments (and lose the roof over their head). However, investor loans may have more flexible features and benefits that could help property investors better manage their property and their repayments.

2. What is the advertised rate and comparison rate?

A handy way to compare the total cost of different home loans is to look at both the advertised rate and comparison rate. While the advertised rate is the interest rate charged on the loan, the comparison rate combines the cost of interest plus standard fees and charges into a single percentage figure. This is a great way to get a better understanding of the true cost of a loan. 

3. What are the fees and features of the loan?

Not all of a home loan’s fees and charges are included in its comparison rate. Consider checking for any extra costs, such as application fees, ongoing fees and exit fees, that you may need to pay.  

Further, some mortgage lenders have special offers for new customers, such as interest rate discounts or even cashback offers. You may also be able to take advantage of helpful features, like offset accounts and redraw facilities, which can assist in reducing your interest charges. 

If having a competitive feature or cashback offer is important to you, ensure you factor this into your home loan comparison.

4. How long would you need to repay the mortgage?

Most home loans terms could last between 20-30 years, and the loan term can affect how much you pay. Shorter loan terms typically come with higher repayments but lower overall interest costs. In contrast, longer loan terms often offer lower monthly repayments but may result in higher interest costs over the life of the loan.

You coulduse a repayment calculator to work out your monthly repayments for different loan sizes and terms. This could help you select a suitable loan term that allows for affordable monthly repayments while also considering your long-term financial goals.

5. How does the home loan compare against the rest?

A quick way to estimate the cost and flexibility of a home loan before you enquire is to look at a comparison table. Comparison tables help you to compare apples with apples, as you can filter down a range of home loan options based on your needs, and view them side by side. This allows you to easily compare your options, and see how they rank based on rates, fees and monthly repayments. 

You can also look at the home loan’s Real Time Rating™ , which more closely indicates a home loan’s overall value. You can also compare some of the top-rated home loans on the RateCity Leaderboards, or look for which mortgages have won a RateCity Gold Award.

6. Do you need help from a broker?

Talking to a mortgage broker is one way you can help make sense of the mortgage maze. These home loan experts can look at your finances and recommend mortgage deals that may suit your personal goals and financial needs.  

Brokers can also negotiate on your behalf to help you get a better deal, provide access to exclusive home loan offers, and manage your mortgage application on your behalf, to help save you time and hassle.

Nowadays, chances are that at least part of the application process will take place online. Where an owner occupier or investor may have once filled out paper application forms and sent off supporting documentation by fax or express post, today you may be able to manage the entire process from home on your laptop, or even using your tablet or smartphone.

Some specialist mortgage lenders are taking online home loans to their logical conclusion and conducting their entire operation online - also known as online home loans. 

As these lenders don’t need to worry about the upkeep costs of maintaining branches or ATMs, or offering other financial products than just home loans, online-only mortgage lenders can often provide new customers with some great rates compared to some of the large banks.

Benefits of online home loans

• Online-only mortgage lenders generally offer lower interest rates and fees on average compared to bigger banks due to fewer overhead costs.
• These cost savings make online home loan options attractive for borrowers looking to refinance at a lower interest rate.
• Online lenders typically roll out innovative technology and financial products well before the big institutions can, providing customers with new and convenient options for managing home loans and personal finances.

Risks of online home loans

• If you like all your banking products in one place, online mortgage lenders may lack convenience, as they often specialise solely in home loans.
• Some homeowners rely on face-to-face customer service and online-only lenders do not have physical branches. That being said, they can still be contacted via phone, apps, and email.
• Big banks and institutions are typically seen as ‘safer’ options, as their sheer size and government support may make them seem less likely to default if the worst were to occur.  

Mortgage pre-approval online

Almost every mortgage provider in Australia, including traditional banks and online-only lenders, should be able to offer home loan pre-approval online.

Pre-approval allows you to determine your maximum budget before finding a property, giving you confidence when negotiating with real estate agents or participating in auctions. You provide the lender with information about your income, expenses, assets and expenses. They analyse this to work out how much you may be able to afford in monthly repayments, and in turn, the loan amount the lender may be willing to lend you.

Are online mortgage lenders safe?

The big banks in Australia are seen as ‘safe as houses’, so it’s fair to ask if your mortgage is just as safe with a smaller, online lender. However, checking the lender's credentials, such as having an Australian Credit License (ACL), can provide reassurance that they follow proper regulations and lend money responsibly.

It’s worth noting that several online mortgage lenders are actually backed by bigger banks, offering not only their finances but their legal protections as well. Doing a little digging into who owns an online lender and where it sources its funding from may be able to help build your confidence in its performance. 

Further, if the bank backing an online lender is an authorised deposit-taking institution (ADI) then money deposited with the bank is protected by the government up to the value of $250,000 thanks to the Financial Claims Scheme. 

When it comes to privacy and security, every online lender should have thorough encoding and security settings in place to protect your data and your money from malicious individuals. Online security features such as two-factor authentication may help you keep your personal information safe at every step of the home loan process.

1. Check your finances: Compare your income and expenses to the cost of home loan repayments, as well as the deposit, stamp duty, and any other fees and charges that may apply, such as an annual package fee for a bundled home loan deal.
2. Collect financial documents: Payslips, bank statements, bills etc. can be used to confirm your income and expenses.
3. Fill out a lender’s home loan application form: This could be a paper form or online.
4. Get pre-approval: This is where a lender agrees in principle to provide a loan, but you or the lender can still walk away.
5. Make an offer on a property: Whether you’re buying at auction or by private treaty, make sure the price is within your budget.
6. Credit check and valuation: The lender will check your credit score (based on your history of managing money) and calculate the value of the property to make sure you haven’t over-borrowed.
7. Application approval: Assuming you’re successful, sign the formal home loan offer and contract.
8. Prepare for settlement: This is the legal transfer of the property from one owner to another. A solicitor or conveyancer can help confirm that everything is done correctly.
9. That’s it! Time to move in or start looking for tenants.