Confused? Nervous? Start with the home loan basics. And if you're unsure how a home loan works, don't worry. You're not alone.
A home loan - sometimes called a mortgage - is simply a long-term loan. You get one through a bank, credit union or other financial institution. Although it is likely to be the biggest loan you ever have, it is designed to be paid off slowly through manageable monthly or fortnightly repayments.
You choose how long you need to pay off the loan. Terms of 30, 25 and 20 years are most common. The lender will use your house as collateral against the loan.
How a home loan works
A home loan is made up of principal and interest. Principal is the amount you borrow. Interest is what you pay to borrow the money. At the start of the loan, your repayments largely consist of interest, with a small amount going towards the principal. As you reduce the principal, your interest charges fall until eventually the loan is paid off.
Case Study: If you took out a $100,000 loan at seven per cent over 25 years, you would end up paying a total of $212,100: $112,100 in interest plus the $100,000 principal.
What's in it for the lender
Home loan lending is the core activity of many banks and financial institutions. They make their money from:
Interest on the loan
Loan establishment fees
Ongoing fees and charges
These charges reflect the cost of money as set by the Reserve Bank, the risk associated with the home loan, the cost of administering it and the need for all businesses to make a reasonable profit.
16 Tips for a Better Home Loan Decision
This collection of tips aims to address the concerns and problems which we most commonly see people experiencing. It's been built up from discussions with eChoice's expert telephone consultants and home loan managers.
Decide what really counts
Everyone has different needs. You may hate the idea of monthly loan fees. Or you may think a few dollars a month is fine - but only if you can pay extra funds into your loan and take them out when you need them at no extra cost. You may want the option of moving to a fixed interest rate down the track. Or you may want to buy as much house as you can possibly afford, even if that means a low-flexibility no-frills loan.
Deciding which of these options suits you is one of the hardest things about taking out a home loan. (eChoice's application process, its telephone consultants and its home loan managers can help you sort out your priorities.)
Consider all the lending alternatives
Twenty years ago, almost everyone got their home loan from a bank or a building society. These days, you have many other alternatives. Specialist home loan companies like RAMS and Aussie Home Loans are growing ever more popular. The latest trend is firms that can offer products from several lenders. Well over half of all US home borrowers now get their loan this way. (This is the way eChoice works; we've selected a panel of lenders to ensure that you receive the loan features, rates and service that best match your needs.)
The right loan for you will have a particular combination of features, service and interest rate. It's unlikely to be the first deal that's offered to you. There's plenty of help available. You can find comparisons of loan rates and features in many places.
Have the lender come to you
Visiting someone else's office can be an uncomfortable experience, and takes more time than you'd want. Some firms - including the Commonwealth Bank and RAMS - can send a "mobile lender" out to visit you and discuss your needs.
Don't judge a loan on its rate alone
Your best loan probably won't have the lowest rate around. The features and service you get can be much more important. For instance, a few of the cheapest loans won't let you make extra repayments. And those cut-rate loans typically have the highest application fees.
Seek out experience
Older friends and relatives will often provide valuable advice as soon as you tell them you need help. Don't be afraid to tap their expertise. (Research by the Roy Morgan Research Centre shows family and friends are the single biggest source of home loan knowledge.) And you can find more expertise outside your immediate circle.
Find a loan you can live with
Many of today's loan products let you take money out of your mortgage for needs like a car or school fees. These are great features - as long as they don't stop you paying off your loan. Will you be strong enough to resist the temptation to use the money that's available? Now's the time to know your limitations: if you can't discipline yourself to repay fast, you might be better off with a less flexible loan. And because it's less flexible, that loan will probably have lower rates and fees.
Get a health check on your existing loan
When you check your existing loan against what else is out there, you may find worthwhile savings. Such "refinancing" works particularly well if you can add other debts into your home loan, letting you pay off a car loan or personal loan at lower home-loan rates. Make sure you don't end up paying your debts off more slowly. Take the refinancing savings and use them to pay off your loan faster.
Lenders may promise quick service, yet take weeks to deliver your loan. Big banks can be as slow as tiny mortgage companies. Paperwork gets lost or delayed. In these cases, it helps to have a representative who can push the lender along on your behalf.
Don't take too much notice of "unbelievable rates"
For instance, some lenders have been offering "honeymoon" rates as low as 3.99 per cent. But those eye-grabbing rates "revert" to a much higher standard rate after a few months, and the fees can be fierce. The loan with the amazing rate may leave you paying more for years afterwards. Or it may only be available under very strict conditions - conditions you don't want to meet.
Watch out for exit costs
Some loans carry a hefty fee if you pay them off early. One of these products may be your best loan - as long as you know you want to keep your mortgage for many years.
Understand how mortgages work
Taking out a home loan can seem scary, especially if it's your first. Talking with friends and relatives will take away some of the mystery.
Don't buy features you won't use
Some Brokers often comes across borrowers who say they want a product such as an "all-in-one" loan, which lets you bundle your salary, borrowings and savings into one account. Many people find that a highly-featured loan perfectly suits their needs. But you pay higher interest rates and fees for all those features. After talking with our lending experts, some of our customers decide they don't need as many expensive features as they thought they did.
Taking out a home loan has less risks than investing (after all, the lender's giving you money) but you may still end up relying on your lender's judgements. You want those judgements to be made in your interest. Choose a lending organisation with a reputation for ethical behaviour. (A few firms have been known to charge just for showing you how their preferred loan will work. This service shouldn't cost you anything.
Beware the Line of Credit
Borrowers like the flexibility of being able to put all your savings straight into your loan, and then draw on it whenever you need it. Many loans let you do this. But some borrowers end up with a product called a "line of credit" - a loan which never gets paid down.
Before refinancing, speak to your existing lender
Refinancing your loan can slash your borrowing costs. But some fixed-rate loans will cost you more to refinance than you could possibly save. In some cases, you'll be better off doing nothing.