How To Select The Right Loan for First Home Buyers

Welcome to Part 6 of our comprehensive guide designed to assist first-time homebuyers in navigating the complex world of buying their first property. This segment of our series delves deeper into how to select the right loan for first home buyers, moving beyond the simplistic comparison of interest rates to explore the multitude of factors that can influence your borrowing experience and financial outcomes.

In this installment, we’ll unpack essential considerations such as lender policies, loan structures, and the functionality of different mortgage products. We’ll also clarify the distinctions between popular features like offset and redraw facilities, providing you with the knowledge to choose a loan that not only meets your current financial situation but also aligns with your long-term property goals. Whether you’re determining the best repayment plan, the right loan features, or simply understanding the different financial institutions’ offerings, this guide is here to ensure you make informed decisions.

Join us as we offer expert advice and practical tips to empower you in your journey toward homeownership.

Tip 22: It’s not all about interest rate 

I understand the focus that borrowers have on getting the lowest interest rate possible. None of us want to give the banks any more money than necessary and it can do us much more good than a bank. But there is more to a home loan than just a cheap rate.

The starting point for borrowers is finding lenders that will lend to them the amount required. Not all lenders will lend the same amount in any given scenario as they have different policies reflecting differing risk profiles and lenders seeking/shunning different lending (for example some lenders do not lend to self employed borrowers).

Next you need to settle on the right structure which involves decisions around:

• The borrowing entity – individual (sole or joint tenants or tenants in common), company or trust
• The desired loan term 
• Repayment type – Principal and Interest or Interest Only
• The loan to value ratio – this can affect both the rates on offer and the policies that apply when assessing the home loan application
• The plan for the property/loan – pay it off asap, turn it into an investment property in a few years
• Loan features/functionality needed – variable or fixed rates, the ability to make extra repayments, redraw, offset, internet banking, mobile banking, branch access
• The fees payable with different loans

Once all this is sorted then you can then talk about rates.

So in the rush to get the cheapest home loan, don’t overlook these other factors as they are just as important and can affect the end cost of the home loan for you just as much as the interest rate.

Tip 23: Choosing a loan – what do you need in a home loan

In the last tip I spoke briefly about loan features and functionality.  I want to come back to this and take a deeper look.

When choosing a home loan lender and product it is useful to consider;

• How do you do your banking now?
• How do you want to use/operate your home loan?

Current banking usage: 

A really simple example, is do you need a home loan provider that has branches you can walk into? Many first home buyers can’t remember the last time they went into a branch. Their banking is all done online or via a mobile app. They are content knowing there is phone support if needed. Some people really want branch access. So give some thought to what you need/use currently with your banking.

Home Loan Functionality:

The answers to these questions are relevant to the loan product you select; 

• Do you want to start paying down the loan from the outset? Or just pay the interest?
• Do you value fixed, certain repayments or would you prefer variable rates which might result in lower repayments if rates drop? (understanding that rates could go the other way too).
• If you value certainty, does that stand if the fixed rate is higher than the variable rate?
• Do you plan or expect to be able to make additional payments on the loan?
• Will you have savings to put into or against the loan at settlement? 
• Do you want access to the savings/additional payments? Is it enough that you can take the funds back out of the loan or do you want immediate, ready access to sufficient funds and would not want to put all funds into the loan as a result

With clarity around how you do your banking and want to operate your home loan, you can narrow down you choices from dozens of lenders and hundreds of products quickly to a short list of just a few. 

A great mortgage broker will assist you understand your needs and select the right loan for you.

Tip 24: Offset v Redraw – What’s the difference?

Lots of clients talk about offset and redraw and use the word interchangeably as if they are the same thing.  While they can have a similar benefit they are different and when it comes time to select a suitable home loan, it is worthwhile to understand the difference. 

A loan with redraw is one that allows the borrower to withdraw from the loan account some/all of any extra amounts paid into the loan above the minimum required repayments. Basically all variable home loans allow redraw (usually without a fee).

An offset home loan is a type of mortgage product that links your home loan account to a savings or transaction account. The balance in this linked transaction account is then offset against the outstanding balance of your home loan when calculating interest. Essentially, the amount in your linked savings or transaction account works to reduce the interest payable on your mortgage.

For example, if you have a $500,000 home loan with $30,000 in a linked transaction account then you are incurring interest on the net balance of $470,000.

Whether you extra repayments into the loan or into an offset account the effect is the same in terms of saving interest and paying the loan back quicker.

Putting extra funds into the home loan or an offset account (if you have this feature) will save you money equally and for many, being able to put extra into the home loan and redraw if/when required will be sufficient. 

There are a few instances where offset is valuable.

While you can get a similar benefit just by putting any savings directly into your home loan and using redraw to pull funds out as you need but it is not exactly the same. Firstly your home loan is not a transaction account so in most cases you need to move funds from the home loan to another account before you use the funds to pay bills etc. 

Secondly, everyone needs some funds in a transaction account and if that account is not an offset account then you are missing some level of interest savings. So the question becomes, how much do you like to have or need in a transaction account.

From a tax perspective there is a difference between the 2 products and this will matter if you plan on turning the property into an investment down the track. If that is the case you will want to put savings into offset rather than redraw (ask your accountant to explain why this is or give us a call).

We hope you enjoyed our tips on how to select the right loan for first home buyers. For more useful tips for first-time buyers, check out part one of our 30 tips For First Home Buyers here, part two here, part three here, part four here, part five here, and our First Home Buyer page in the knowledge centre here.