Signing Up for a Home Loan? What Questions Should You Ask First?
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Before you sign your name on the dotted line and commit to a home loan and years of mortgage repayments, there are a few questions we recommend you ask first. Taking out a mortgage is a big commitment, so it's important that you understand what you're signing up for and know exactly what features, benefits and costs to expect over the course of your loan. In this issue, we've looked at a few of the key questions you need to ask before you put pen to paper.
There are some key questions that you really need to ask before 'marrying' your mortgage. Given the fact that your mortgage will have an ongoing impact on your finances and lifestyle for many years to come, it's advisable that you know exactly what you're going to get from your home loan – and what you need to give.
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Here are some pointers…
What comparison rate can I expect over the life of my loan?
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It is a mandatory requirement that lenders must publish the comparison rates for any credit that they offer that is regulated by the Consumer Credit Code in any advertisements of credit. Knowing the comparison rate will enable you to get a good idea of the total cost of your loan across the entire loan term. You may think that the home loan you're looking at has a great, low interest rate, but if you don’t check the comparison rate, you could be 'surprised' by high fees over the longer term of your loan.
The comparison rate is calculated using a standard, industry wide formula prescribed by legislation that takes into account amongst other things the amount and term of the loan, the interest rate at which the loan is taken out, the fees and charges attributed to the home loan and the repayment cycle, i.e. how many repayments will you be making and at what intervals - monthly, weekly, fortnightly etc.
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What features does my home loan offer?
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Some home loans offer you a wide range of different features, from special introductory rates, to different payment methods or different access methods, such as cheque, credit card etc. It's a good idea to find out exactly what features are offered on your home loan and make sure you know what it will cost for you to utilise each feature.
You may find that your home loan offers you some features that you don't need and would never use. There's no point incurring fees for features that aren't of any use to you – you need to make sure your money is working hard for you, not being drained by 'extras' that don't offer any actual extra benefits.
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Are there any costs if I make extra repayments?
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It's important to find out if you'll incur any fees if you make extra repayments on your mortgage. If you won’t, then it's a good idea to put as much of your money as you can onto your mortgage and reduce the residual as much as possible when you have the money at hand.
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Can I pay my salary directly into my home loan without incurring charges?
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If you're not going to be charged to make extra repayments, then it's worthwhile having your salary paid into your home loan account or an offset account and just use the money you need each week for bills and other expenses you’re likely to have.
If your home loan is linked to an offset account, you can effectively offset the daily balance in this account against your actual home loan account. So, any money that you hold in your offset account will earn 'notional interest', which is offset against any interest payable on your home loan account. So, you're continually reducing your residual and helping to chip away at your mortgage that bit faster.
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Can I change from a fixed to a variable loan or split my loan with no extra cost?
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Whether you take out your home loan at a fixed, variable or even split rate, there's no doubt that interest rates and potentially your lifestyle situation will change over the life of your home loan. So, it's important to make sure that you have the flexibility and the freedom to make your money work as hard as possible by being able to chop and change from a fixed, to a variable or a split rate when and if you need to do so during the life of your loan.
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Can I choose when I want to make repayments?
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You may work your budget on a weekly, fortnightly or monthly cycle, so you may want to keep your mortgage repayments in sync with your budget. However, some lenders have set terms for repayments and only allow them on a monthly basis. Make sure you find out whether you can make your repayments according to a schedule that suits you and your budget.
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Can I withdraw on my home loan?
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If you're able to make extra repayments on your home loan but realise that you need to access your money for an emergency or to finance home renovations etc, you need to know that you won't incur any fees to draw down on any available redraw on your home loan.
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What are the fees and charges?
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Make sure you establish what the fees and charges will be on your mortgage and cater for them in your budget. If you don’t, you may find that you're surprised by how quickly small amounts can add up to a larger financial undertaking.
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Will it be easy for me to refinance if I want to do so?
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You may want to look at refinancing your home loan at some point in the life of your loan - perhaps to finance renovations or use for purchasing an investment property. So, it's important that you know up front whether the home loan you take out now will enable you to remain flexible tomorrow, next year or in the next decade.
To find out more about the different home loan options available at RAMS that you can consider and to have any other questions you have answered, speak with a RAMS Consultant today.
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