What to look at before getting a home loan

Australia’s home loan market is a very competitive space, with everyone from the big banks to smaller lenders such as mutuals, credit unions and online providers all offering loan products. 
 
For most of us, our mortgage is the biggest financial commitment we’ll ever take on. And with the forest of competing offers in front of us, taking the time at the outset to compare home loans thoroughly can save huge amounts of money over the long term. 

Comparing interest rates 

The obvious first comparison is the interest rate but, Ahmed Nabi, Digital Lending Specialist at Australian Unity says, it’s here that people must be very clear about what they are comparing. 

“Most people see the actual interest rate that is advertised and compare on that basis. But for every advertised home-loan interest rate, there is a second interest rate that is called the ‘comparison rate’. As the name suggests, that is the one you should be using to compare,” Ahmed says.  

The comparison rate gives you the true cost of the loan over the course of a year, as it incorporates all the fees and charges, and anything else the lender might include as a cost. Required under the National Credit Code (NCC), the comparison rate calculation is based on the following criteria: 

• loan amount of $150,000

• loan term of 25 years

• fortnightly repayments

• interest rate

• monthly account fee (if any)

• annual fee (if any)

• establishment fee (if any)

• valuation fee (if any)

• mortgage documentation fee (if any)

• settlement fee

“The comparison rate is the true cost of the loan,” Ahmed says. “Call it interest, call it fees… If, at the end of the day, you are being charged something as part of your home loan, it is in that rate. If you incorporate all of those charges and add up all the interest over the course of the year, that’s the comparison rate. It enables consumers to compare apples with apples.” 

The comparison rate must be disclosed; the Australian Securities & Investments Commission (ASIC), which oversees the National Consumer Credit Protection Regulations (NCCPR), requires any entity that is advertising a loan interest rate and/or loan repayments to provide a comparison rate that is just as clear as the interest rate the lender is promoting.  

“Usually, where you see an advertisement for a home-loan rate, there will be one interest rate given on the left-hand side. Directly next to it, normally on the right-hand side, you will see another rate given, that is the comparison rate,” Ahmed says. 

“For example, if one lender has an advertised rate of 2.29 percent, and another is advertising 2.59 percent, you might find that the comparison rate of the first lender is actually higher, because of their fees. We still find that many customers don’t understand what the comparison rate is, and instead make their decision on the advertised rate.”  

Making sense of the fees 

It is important to note that the comparison rate does not include all fees and charges. For example, it doesn’t include government fees and charges, or charges that you would only pay in certain circumstances, such as if you pay off the loan early. It also doesn’t include other factors that may make a loan more attractive to a customer, such as the ability to “package” it with the lender’s other products, access to fee-free accounts or more flexible repayment arrangements. 

Ahmed says the comparison rate is particularly effective at demonstrating the true cost of loans with a low introductory rate that revert to a different interest rate after a set period. 

“The comparison rate for the introductory rates is actually much higher than the advertised rates, because it brings in the impact of what happens after those one or two or three years when the interest rates reverts,” Ahmed says. “We often find that people attracted to the introductory rates are normally first-home buyers, they just want to get the best rate. They’re thinking that after one or two or three years, they’ll probably refinance anyway. But more experienced borrowers will compare the loans properly.” 

You’re an individual—and so is your loan 

The drawback of the comparison rate is that there will not be many people with a loan of $150,000. “Technically it is individualised, nobody’s interest rate is exactly the same,” Ahmed says.  

“What will be your ‘best’ or ‘ideal’ home loan means different things for different borrowers. But usually, it’s a combination of a low interest rate, minimal fees, flexible repayments, and features like offset accounts, redraw facility or the ability to ‘split’ the loan.” 

As Ahmed points out, at the end of the day, everyone’s situation is different. “Just remember that the more features a home loan includes, the more likely it is that you’ll be charged higher interest rates and fees.” Ahmed says. “But the comparison rate should be your starting point for assessing your options.”  

All the rate comparison websites display comparison rates. “If you ‘click’ on to a loan rate, it will show you the comparison rate,” Ahmed says. “Consumers should inform themselves as much as possible, and these days, there’s no excuse to be in the dark about the true cost of a loan.” 

If you’re looking to buy a home, taking extra care to understand your home loan and its interest rate will you put you in a better position over the lifetime of your loan —and save you thousands of dollars too. 

Please visit our home loans page for more information regarding the loans available through Australian Unity or to access our borrowing calculator and other useful tools.