Finding the right mortgage is as challenging as finding a home you fall in love with.
There is no one-size-fits-all mortgage solution, with the range of loans and features on offer so vast that individuals must decide which features, interest rates and products best fit their lifestyle and financial goals.
Mortgages come in all shapes and sizes, from shared equity loans – where you pay a lower mortgage in exchange for sharing your capital gains with the lender – to mortgages that offer payment holidays for new parents.
There are Family Pledge mortgages that allow parents to help their children buy property without a deposit and Professional Package mortgages that offer discounts, flexibility and credit cards for one annual fee.
“Choose the loan that’s right for your circumstances, not the loan your family or friends recommend,” says Lisa Montgomery of non-bank lender RESI.
With tightening credit markets, the big four banks are tougher with their lending criteria and are may take time to approve finance.
“We are expecting more lenders will be demanding a 10 per cent deposit and genuine savings before they approve finance,” says Canstar Cannex financial analyst Frank Lopez, who rates and reviews mortgage products.
St George general manager of retail banking Andrew Moore agrees that there will be a return to the “good old days” when people had a relationship with their bank manager and would be offered better loan terms in exchange for customer loyalty.
“The market is moving to a tiered structure where new customers will need a 10 per cent deposit but existing customers should be able to use five per cent deposits,” he says.
St George still offers a five per cent deposit home loan, but has abandoned the 100 per cent loans it used to offer since the Global Financial Crisis restricted credit.
“It’s definitely a changing mortgage market out there,” Moore says.
The big question with a mortgage is whether to fix the interest rate or remain with a variable rate, which fluctuates with the Reserve Bank of Australia’s movements on cash rates.
The benefits of fixing a mortgage seem obvious – it offers the security of knowing what to pay for the fixed period and can safeguard against rising rates
The downside is fixed loans are less flexible, rarely allowing extra repayments which give borrowers an ability to build a tax-effective buffer against job loss or illness.
Plenty of homeowners were stung by fixing their interest rates as they worried about rates climbing.
Aussie Home Loans broker Duane Brown has encountered customers who fixed at higher rates only to want to re-finance to today’s lower rate loans but facing break costs of more than $45,000.
A variable rate mortgage might not offer the same payment security, but often comes with features like free account-keeping fees, the ability to use a redraw facility to withdraw extra equity if unemployment or illness means you can’t pay for a period of time and no fees for making extra payments.
Variable loans will also take advantage of falling interest rates, which some pundits are predicting will happen, and therefore make mortgage payments cheaper.
Interest-only loans – which charge monthly interest rather than principal and interest – offer cheaper payments than typical mortgages, but are best used by investors who want to negative gear their home purchase. The interest-only period only lasts for a certain period of time, and most lenders want to charge you a premium for these loans.
Montgomery says some mortgages offer a basic variable rate, others offer a discounted variable rate and then there are introductory rates and fixed rates.
All lenders are obliged to reveal their comparison interest rate (which is always higher than the “headline rate”) but borrowers need to check deferred establishment fees or discharge fees, which can be hefty additional costs that may not be calculated as part of the comparison rate.
“There are a couple of products out there that are offering an extremely low interest rate but revert to a higher rate – a big thing to watch out for,” Montgomery says.
The true cost of a mortgage is not just the interest rate, but the features and flexibility that can be bundled in to the loan that may save you money.
For example, it may be better to pay a slightly higher interest rate on a loan that offers no monthly fees, no extra payment penalties and free redraw and discharge fees. Only you – the borrower – can work out which mortgage ingredients will work best for you.
Lopez suggests the professional package mortgages offer great value, with interest rate discounts of up to half a per cent and features like fee-free transaction accounts, credit cards and redraw facilities for one annual fee.
But he says first home buyers might prefer a basic no-frills loan with a discounted interest rate that allows the cheapest possible repayments.
“Redraw, repayment holidays and flexible aspects of a loan are great but are you likely to need it in the first few years?” Lopez says.
“If you don’t need them, skip the features and pay less by going for a basic product.”
Moore suggests borrowers keep their eyes peeled for special offers, such as low interest rates or waived fees that banks and lenders offer as a promotion to gain market share.
Choosing the right mortgage – and loan amount – can make all the difference to lowering the risks of taking on a 25 or 30 year mortgage commitment.
“Everyone’s worried about unemployment, so it makes sense to structure your mortgage carefully,” says first home buyer Cameron Jenkins, who bought a studio apartment in Rose Bay.
The public relations manager had a frank conversation with his boss before committing to the mortgage to make sure his job was safe.
“I also realised now was the time to build a buffer and pay more in advance so I have room to move if something goes wrong,” he says.
Jenkins weighed up the costs of renting in nearby Bondi versus buying a small studio apartment and made sure his mortgage payments were similar to rent.
“A lot of people were telling me to really extend myself on my first place, but I would rather be in a smaller place making the double the repayments,” he says.
Jenkins sourced his loan through Mortgage Choice, an independent broker that offers loans from a range of lenders.
“The broker did all the work because my loan was quite complicated,” Jenkins says.
“Most lenders won’t do loans for properties under 40 square metres, so I only had the choice of two lenders.”
Jenkins went with St George, who offered a basic variable rate with free redraw and no fees to make extra repayments.
Newcastle couple Matt and Tong West researched mortgages carefully before deciding to take out the Commonwealth Bank’s Complete Home Loan package, which offers a standard variable rate.
The couple went in to their local bank branch to apply for the loan, and found it quick, easy and painless.
“All we had to do is hand over what they asked for and they gave us unconditional approval very quickly – I was surprised because I thought bank service would be terrible,” Tong says.
The quick approval might have had something to do with the 35 per cent deposit the couple had saved towards their home, which cost under $500,000.
“We don’t want to live with lots of debt and have only one debt – the home loan – which we want to pay off as quickly as possible,” Tong says.