How to compare home loans

Want a more efficient and effective way to compare home loans? Just follow these steps:

1) Identify the non-negotiable features you need.

Google those features and shortlist the banks that offer them. Forget about the others, as there’s no reason to spend time of offers that don’t suit your needs.

Case Study

A 10% home loan deposit is below the 20% threshold for most loans. Kath googled the feature low-deposit home loans and saved the links to all relevant home loan providers offering that feature.

Learn here about all the features you might need.

2) Narrow your list even further by looking at the comparison rates.

The comparison rate is a government-mandated rate that lets you quickly compare home loans side-by-side since it incorporates the impact of fees into the interest rate. We’ll look at fees and interest rates later but for now, the comparison rate makes it easy to weed out unfavorable loans.

Understand

Use the comparison rate to quickly weed out unfavorable loans and for quick calculations, but also get familiar with the fee structure for negotiation purposes.

Choosing a lender based only on the comparison rate doesn’t help you understand the actual fee structure, which is important if you want to negotiate.

3) Research each loan’s interest rate, fees and other features.

List your new loan options from step two in a column and put three headings across the top:

  • Actual interest rate. This is how much your debt will grow each year. The lower the better.

  • Fees. There are dozens of possible fees (think “application fee” and others). Look for options with lower and cheaper fees. Learn all about home loan fees here.

  • Comparison rate. The effective interest rate after fees are factored in.

  • Features. All options on your list will contain your non-negotiable features. This list is for other features you may find useful.

You’ll now have a table where you can fill out the relevant details. So get filling!

Note

This guide just focuses on variable-rate interest loans. Fixed-rate home loans are more of a special feature you can sometimes take advantage of for a short period of time.

4) Talk to the banks.

It’s a highly competitive market, so call all the banks on your list and try to negotiate a better rate, citing lower rates you’ve found elsewhere.

See if they’ll drop fees that other banks don’t charge or that don’t seem relevant.

If they agree, ask them to quote you a new comparison rate – then plug that into your table.

If you’re not the assertive type or you find this too time consuming, you can always talk to a home loan broker to help negotiate with banks on your behalf.

What is a mortgage broker?

A mortgage broker is a middleman who negotiates home loan terms with lenders, on behalf of you the borrower.

With a broker, you only have to explain goals and financial position once – and they will go off and speak to multiple lenders for you.

They’re usually paid by charging referral fees for successful loan referrals. So make sure they’re not simply passing you off onto a preferred lender rather than the one that’s best for you.

5) Sort by comparison rate.

Look at the banks that have the best rate and then consider if you feel comfortable taking out a loan with them.

This is where you can take soft traits into account:

  • Do you feel more comfortable with one of the big 4 or are you OK with a smaller bank?

  • Did you establish rapport with the loan officer?

  • Do you find any of the other features from your table useful?

  • Do you like the look and feel of the lender’s app and other online tools?

Note

There are other factors besides the comparison rate that determine how much you’ll pay over time, including the length of your loan, how often you make payments (weekly, fortnightly or monthly), your deposit size and others.

However, most of these options are standard variables that most banks will offer. If you want to estimate the actual cost of your loan over time based on your comparison rate and these other options, you can use one of the many home loan calculators available online.

That’s all there is to it

Comparing home loans doesn’t have to be complicated, but you do have to be thorough. As long as you do the research and stay organised, you should be able to home in on the right loan for your needs.

Once you do, the next step is to fill out your application.