INTEREST rates may be at record lows, but first-home buyers are still being urged to shop around before choosing a home loan.
Canstar’s finance expert Steve Mickenbecker said it was important to avoid the temptation to accept the first loan offer that came their way – the appeal of a low interest rate may be short lived if the low introductory rate is replaced by a high rate after a year or two.
“Nowadays people don’t buy anything without comparing the price and your home loan should be no different to this, which is why we want to encourage first-home buyers to compare loans from a range of lenders,” he said.
“It’s important to find the right home loan to ensure you don’t end up paying too much over the life of the loan.
“In addition to finding the right price, it’s worth looking for a loan that offers flexibility to make extra payments and withdraw it if necessary.”
Mr Mickenbecker said before buying a home, first-home buyers will often find one of the biggest steps is understanding what is needed in a home loan and how to get a good deal.
“There are several considerations that are important when it comes to buying a first home, including the interest rate, the fees and the features,” he said.
“To make their dreams a reality, first-home buyers should do their research before making any financial decisions.”
Canstar has highlighted four key points first-home buyers should consider.
1. Interest rates
When exploring available interest rates, first-time buyers are faced with the choice between a variable or a fixed rate.
A variable interest rate is a common type of loan offered by lenders, with the interest rate fluctuating with the market.
“Look for a variable interest rate below 3.47 per cent as this is the entry point to the lowest home loans on Canstar.com.au, ensuring you’re getting a competitive rate,” Mr Mickenbecker said.
A fixed rate allows borrowers to lock in an interest rate for a determined length of time, generally between one and five years.
The entry point to the most competitive 3-year fixed rate loans on Canstar.com.au is 3.33 per cent, so new buyers should be on the look-out for a rate below this if they are looking to fix.
Not only do first-home buyers have to review their interest rate options, they also need to consider the fees and charges associated with a home loan.
“It’s important to understand the associated costs for any particular home loan, as the fees and charges could add up to a few hundred dollars annually,” Mr Mickenbecker said.
An application fee is a once-off fee paid to the lender for setting up a home loan.
It can also be called an establishment fee, up-front fees, start-up fees, or set-up fees.
While some lenders do not charge an application fee, they may charge higher ongoing fees.
These are charged every month or year for administering the loan.
There are a number of lenders that do not charge ongoing fees, which can be as high as $750 annually.
Mr Mickenbecker said it was a good idea for first-time buyers to look for a loan that gave them the flexibility to make extra repayments and pay off the loan ahead of schedule.
“As unlikely as it seems now, the time will come when buyers can afford this and it will help them to get ahead financially,” he said.
“The loan should come with a redraw facility, meaning homeowners can take the early payments back out of the loan if needed.
“This gives peace of mind to stretch and make maximum payments into the loan.”
Another way to do this is with an offset account, which is a savings or transaction account linked to a home loan account.
The loan is not charging interest on the balance in the offset account, meaning more of the monthly loan repayment goes towards getting the outstanding loan balance down.
Eventually, the savings will be available to clear the loan.
Mr Mickenbecker said in both cases, buyers should find a loan that does not charge extra fees or penalties to give this flexibility.
They should ensure they conduct research to understand loan features, including mortgage offset accounts and redraw.
4. Education and extra resources
Shopping for a home loan should not be solely price driven and borrowers should find a balance between price and the extra value offered from the home loan lender.
Canstar has researched and rated 661 different home loan products from 81 lenders to determine which financial institutions offer the strongest combination of products and services for first-home buyers looking to enter the property market, particularly looking at the higher level of support new buyers need to help them through uncharted waters, and has announced the winners of its 2019 First Home Buyer Award.
ANZ won the Bank of the Year Award for First Home Buyers, which is presented to the institution that performed best across all states and territories.
ANZ also won this award in 2018, 2017, and 2015.
Canstar said where ANZ excelled was the additional obligation-free support they offered to assist Australians throughout their journey entering the housing market, including a First Home Coach program, which provides support from when the home buyer is first starting to plan, rather than waiting until they are ready to buy.
The Customer-Owned Institution of the Year Award is awarded to institutions, such as mutual banks, credit unions and building societies, that offer financial services in each state or territory.
In WA the winner was Beyond Bank.
Its extensive network allowed the bank to provide in-person support when needed and it offered a good range of products to first-home buyers.