Tips for borrowers looking at a home loan

Buying a home is one of life's biggest purchasing decisions for most Australians. We have listed below some ways that can help you save money on your home loan.

1. Add up those home loan fees

Once you have saved up the deposit for a home, do not forget to take into account all the extra fees that come with buying a house. These include stamp duty, legal costs, disbursements, mortgage insurance, pest inspection report, survey report, builder's report, strata inspection report, home loan application fee, valuation fee, registration fee and other sundry fees like refinancing or switching fees.

On a mortgage loan of $300,000, expect to pay at least $15,000 in fees. With mortgage insurance, this will rise to about $17,470.

2. Additional repayments

Making additional repayments to your home loan beyond what is required in your minimum monthly repayment is one of the best ways to reduce the total interest paid and term of your mortgage loan.

As a rule of thumb, every $1 in extra repayments you make early in the life of your loan saves around $2 in interest over the term of the home loan, depending on the level of interest rates.

Consider either one-off lump sum payments when you have spare cash or commit to increasing your regular repayment amount. However, make sure that your home loan allows you to make additional repayments without penalty.

Fixed rate and basic (or 'no-frills' home loans) often have restrictions on extra repayments or charge a fee for the privilege.

3. Ask about 'professional package' discounts

If you are earning more than $50,000 a year, or $80,000 or more with a partner, ask your mortgage broker about the "professional package".

The home loan interest rate is usually discounted by 0.5% on whichever loan you choose. Relationship discounts are also available from mortgage lenders, banks and credit unions for those borrowers who consolidate a range of planning business with the one institution.

Home loan discounts, savings account fee waivers and credit card annual fee waivers are commonly offered.

4. Be careful of 'honeymoon' intro rates

Mortgage lenders entice borrowers to their home loans with attractive low introductory rates. These rates may be up to 2 percentage points below the standard rates for home loans and can look very attractive.

However, these "honeymoon rates" only last for six months to a year before automatically reverting to the standard variable rate offered by that mortgage lender. By all means take advantage of these discounted interest rates, but don't let them dictate your choice of mortgage loan.

It is far more important to compare home loans by flexibility of features and the standard variable rate that you will face for years into the future.

The 'comparison rate' that lenders must publish for each home loan is a much better tool with which to compare the true interest and fees costs of different mortgage loans.

5. Beware fixed rates

Attractive when interest rates are rising, fixed rate home loans also lock you in for a fixed term and as such, are less flexible than variable rate home loans. Please note that you may not be able to make additional repayments or pay the loan out early without facing high penalty charges with fixed rate home loans.

Fixed rate loans suit borrowers who really value the certainty of knowing exactly what their future repayments will be. For example, property investors and borrowers on a tight budget.

6. Can't get a standard home loan with the bank? We have alternative financial solutions

If the mortgage lenders won't lend to you because you're self employed, newly arrived in the country or have a poor credit history, don't worry as we have alternative financial solutions that cater just for you, including low doc home loans, non conforming home loans or bad credit home loans.

7. Check your bank statements for errors

There are claims that more than 50% of home loan statements contain calculation errors. Simple mistakes, like the entry of the incorrect balance or the application of the wrong interest rate at the wrong time can be costly and mostly favour the mortgage lender.

8. Compare home loan features, not just rates

The more flexible the home loan, the higher interest you will pay. A variable home loan which allows you to draw against repayments or offset savings against the mortgage will have a higher rate than a basic home loan.

Always compare home loans with the same features when looking for the best interest rate. Alternatively, you can use a mortgage broker to do all the legwork and research for you.

9. Consider a portable loan

A portable home loan allows you to sell one property and move to a new one without having to refinance. For example, pay out the old home loan and take out a new one. This saves on application and legal fees.

Most mortgage lenders will insist that the home loan amount required for the new property is no greater than the existing amount borrowed.

10. Do you need a redraw facility?

A redraw facility allows you to make additional repayments on your mortgage, and then have access to the additional repayments if you need to.

However, the facility is normally only available on Standard Variable home loans, which are more expensive than basic variable home loans. Before you choose the more expensive home loan, make sure you understand the conditions attached to the redraw facility as it may include a minimum amount and a fee every time you use it.

11. Do your homework

There are so many home loans on the market these days with an increasing variety of rates, fees and features that it really pays to shop around. A mortgage broker from Intellichoice will be able to help you with this - we will do all the research and legwork for you, thus saving you time, money and stress.

12. Don't fall foul of the taxman

If you're an investor in rental property, take a note of these common problem areas the ATO finds with deduction claims.

Legal fees are only deductible if they're associated with taking out a investment loan to buy property - not for the actual purchase. These fees can be claimed along with other borrowing costs but not in the year of purchase. They must be depreciated over the life of the mortgage loan.

Another deduction scrutinised by the Tax Office is depreciation, relatively easy to calculate for new properties but harder for established homes. Investors may try to determine these on their own but can pay a quantity surveyor to do it.

The other area targeted in ATO audits is travel expenses associated with rental properties. Travel claims are allowed for the investor to do repairs, collect rent or carry out inspections. The property does not have to be interstate. A yearly per-kilometre claim can be made no matter where the property is.

13. Don't rely solely on comparison rates

All mortgage lenders must now include "comparison rates" in advertisements for their home loans and personal loans to help consumers get a feel for their total cost - fees and the interest. Don't rely solely on comparison rates when choosing a home loan and beware of their shortcomings.

They only take into account fees and interest rates, not the features and how suitable the home loan is for your circumstances.

14. Keep accurate records

Keep accurate records of your deposits and ATM transactions. It is also wise to keep copies of your home loan application and approval documents in a safe place. This is the best way to avoid hefty fees which may be charged by a mortgage lender when its customers want to see copies of their cheques or mortgage loan files.

15. Look for flexibility

When taking out a home loan make sure it offers the flexibility to meet the changing circumstances you will undoubtedly experience over the 10 to 25 years of your mortgage loan. The ability to make extra repayments, redraw extra repayments, fix the rate on a portion of the mortgage loan, or refinance to another mortgage loan if need be are all features to be considered.

Most fixed rate home loans and some basic home loans don't allow you to make additional repayments, or may charge a penalty for doing so. Make sure you understand the terms and conditions before taking out your home loan.

16. Make the most of rate falls

If monthly repayments drop because interest rates have fallen, try to maintain the old repayment levels. This means you will pay off more of the principal with each repayment, reduce the term of your loan and the total amount of interest paid.

17. Make your surplus cash work harder

Use cash savings to help pay off your home loan quicker. Remember the old saying 'a dollar saved is a dollar earned'? If you have a home loan at 7%, every extra dollar you pay off the principal is another dollar you are not paying 7% on each year.

If you instead put that extra dollar into a savings account, you are only going to earn 2 or 3, perhaps 5% at the most. Therefore, putting savings into your home loan earns you twice as much as a savings account.

These days, redraw facilities available on most standard variable home loans allow you to take back those extra payments if needed anyway.

18. Pay your home loan off quicker with fortnightly or weekly repayments

Converting your monthly repayment into two fortnightly or four weekly payments can reduce the term of your loan in two ways:

• there are more than two fortnights or four weeks in every month, so dividing your original monthly repayment into two or four means you actually pay more over the course of a calendar month

• when interest is calculated daily, the more frequent repayments result in less interest being charged to your mortgage loan over the course of a month

19. Quit smoking

If you smoke a pack of cigarettes a day, it is costing you almost $3000 a year. Quit, and put the daily saving of $8 or so aside and pay an extra $240 each month off your mortgage loan.

20. Save interest with offset accounts

An offset account not only save you home loan interest, they help beat the taxman as well. Savings in offset accounts are subtracted from the outstanding loan amount each month so interest is charged only the net amount.

Interest paid in cash to your savings account is taxable, but the same interest used to offset home loan interest is not – a tax effective way to reduce you home loan.

However, to get the most from an offset account, look for accounts which offers a 'full offset', ie. paying interest at the same rate charged on your home loan. Redraw facilities and line-of-credit loans make use of your savings in much the same way.

21. Save with a line-of-credit loan

Disciplined borrowers can make use of the increasing range of line of credit loans, also called salary account or all-in-one loans, which offer the chance to make every spare dollar work to reduce your home loan. These loans allow your income to be paid directly into the loan account to reduce the loan outstanding sooner than waiting for the repayment due date.

You are also effectively making larger repayments because you only withdraw the money you need to live on each month, leaving all surplus cash in the loan account to reduce the balance.

In this way, the loan can be paid off much quicker and thousands in interest saved. Line of credit borrowers must be disciplined, however, and not withdraw more money over time than is going in. Income you bank must exceed your total expenses by at least the value of your principal-and-interest loan repayment before there is any financial benefit.

22. Use your home equity to borrow

The more you pay off your home loan, the more of the property you own or the more 'equity' in the property you build up. With a more flexible planning system these days, it is possible to borrow against this equity for further investment; a second property, shares etc.

The advantage of borrowing against this equity rather than taking out a personal, investment or business loan is that the interest rate will invariably be lower – the better the asset you put up as collateral, the better the terms a lender will offer. Nothing beats bricks and mortar security (in this case, your home).

If you would like more information on other ways to save money on your home loan, speak to an experienced mortgage broker from Intellichoice today on 1300 55 10 45. We will be more than happy to answer any queries you may have.