Mortgage interest rates can be charged to your home loan in several different ways.
Having looked at whether you opt for interest only or principal & interest the various ways you can repay the capital amount of your home loan, the next step is to consider the options you have with the interest you pay.
The interest rate you pay on your home loan is the most important part about buying a house. After all, your aim is to borrow money for the least possible cost, so you need to assess which type of interest rate is best for your circumstances.
Home loans – Which type of mortgage is best?
As you might expect, there is no simple answer to which home loan is best. Most people obviously want the cheapest deal they can get, but you may be willing to pay a little extra for a home loan that’s a more flexible.
For example, the cheapest mortgage rates may not have any of the additional benefits of an offset cash account or line of credit to allow you to draw down additional funds as needed.
Weigh up the pros and cons, of these additional features. Is it really worth paying an additional $2000 a year in interest for $200 worth of benefit
It’s obviously not just a question of cost; you may feel the peace of mind of having additional funds available to draw down on is worth the additional payments.
However, don’t be bamboozled by mortgage lenders with expensive rates with loads of functionality. Some mortgage lenders harp on about how much direct salary crediting can save you, but in many cases if you look at their box standard product without the features you could of saved yourself a small fortune.
Fixed rate home loans
Fixed-rate and capped rate home loans are often popular choices when interest rates start to rise and if you’re on a tight budget they are generally the best choice, however, you sometimes find the rate fixed at such a high level that it just doesn’t make sense to opt for these rates. ie ask yourself, why am I opting for a fixed home loan at 8% for one year when you can get a honeymoon rate of 7%?
When comparing mortgages, it’s also a good idea to compare the monthly amount you’re quoted rather than comparing various Comparison Rates* (interest rates over the term you have chosen). After all, you’re free to switch to another lender after your early repayment period. The average time a mortgage is held with a lender is typically around 7-10 years, so why only compare your interest rates over a 25 or 30 year period?
When you compare costs in this way make sure you also take into account upfront costs like the mortgage application fee.
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Comparison rates are a significant tool in the decision process but they aren’t the be all and end all
The Comparison Rate is a rate that all lenders have to quote to you when giving you their headline rate. This was brought about to ensure that you, the consumer, were more informed about the impact of the overall costs in obtaining the loan, ie what’s the impact of all these additional/hidden charges? And is definitely a step in the right direction to ensuring you are informed
Unfortunately, some lenders have taken this one step further selling on the basis of the comparison rate alone. Think about it, if you’re only going to be with a lender for 7 years, shouldn’t the cost savings over the first 3-4 years be more significant in your decision?
Ensuring you use a mortgage broker that isn’t limited to one lender or works from a panel is one way of ensuring you’re not given an unsuitable product
If you’re recommended a product that ‘coincidently’ is both the most suitableand happens to be the company the broker works for ask yourself if it’s really the best product for your needs
It’s not that all mortgages sold by company representatives are inappropriate, but you have to question the independence of a broker who is typically paid higher commissions/given higher credit for selling their own products.