How to Compare Home Loans – Tips

One common trap that Australians fall into when they compare home loans is to just concentrate on the interest rate. Here we show you why that's dangerous and what you can do to avoid making inaccurate or misleading comparisons.

Interest rate is one factor that is certainly important when you compare home loans but it is not the only factor. Fees and charges can rapidly change the shape of a loan, so this is a major thing that you must consider. Make sure you know ALL the fees and charges upfront – including the start-up or application fees, any monthly or ongoing/account-keeping fees, as well as the charges for early loan termination ( for example, if you want to repay the loan early because of extra income.) All of these fees have the potential to make a low-interest rate loan suddenly seem far less attractive!

A much better guideline when you compare home loans is the comparison rate, which lenders must provide. This takes into account the interest rate plus all of the fees except the early termination fees, so it's a much better benchmark to use if you are trying to compare home loans on a like-for-like basis, which can often be difficult.

A good tip is to use a couple of financial calculators in conjunction with your home loan comparison research. One type is a maximum borrowing calculator so that you can work out what the banks are likely to lend to you, based upon your total income and your total liabilities. This is good for giving you an idea of the total principal of the loan you should be looking for – clearly if the banks are going to lend you $300,000 there's no use looking for properties starting at $600,000.

The Home Loan comparison calculator lets you compare home loans directly. You can enter the details of 2 different loans with same principal and the same length of repayment period and see how differing interest rates will affect the principal and interest repayments. This will show you that even small interest rate fluctuations can mean a large difference to a loan. Bear in mind that these calculators only work with a fixed rate loan.

When you compare home loans in Australia it's important to remember there are different types of interest rates. We have mentioned the fixed rate loan where the interest rate remains the same throughout a fixed term of the loan; then there's the variable interest rate that will fluctuate, usually in accordance with the Reserve Bank cash rate; then there's the partially-fixed rate which is a combination of the two.

Finally, as well as different interest rates there are different types of loan but most commonly you will be looking at the principal and interest type loan that we have described above. Other possible types you may encounter are Interest-only option loans or low doc loans.

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