Choosing a home loan on the size of the repayment alone can be a costly mistake. Whether you want to be near Redhead Beach or are moving up from a smaller place, the loan you pick shapes your budget for years. Here are the common slip-ups, and how to avoid them.
Is the Home Loan Interest Rate the Only Thing to Compare?
No. The interest rate matters, but fees, features and how the loan behaves over time also change what you pay. A loan with a lower advertised rate can cost more once annual package fees are added, and a loan with a slightly higher rate can suit you if it has features you will use.
When you compare home loan rates, look at the comparison rate, the ongoing fees and whether the loan has a linked offset account. An offset account is a transaction account that reduces the interest charged on your loan by the balance it holds. The trade-off is that offset loans and packages often carry an annual fee, so the feature only pays off if you will keep a decent balance in the account.
A broker can compare home loan options from the lenders on its panel, so you are not limited to what one bank offers. Ask which lenders are included. Our home loans page explains how we do that.
Why Get Home Loan Pre-Approval Before You Inspect Homes?
Pre-approval shows you a realistic loan amount before you fall for a property. It lets you bid, or make an offer, with a clear budget in mind.
Pre-approval is a conditional lender assessment, not a final decision. The lender will still check the property and your situation again at formal application, and pre-approvals expire after a set period, so ask your lender how long yours lasts. A good first step is to check your borrowing capacity and then talk through what you are comfortable repaying, which can be lower than the maximum a lender will offer.
Interest Only or Principal and Interest: What a Lower Repayment Really Costs
Interest only repayments are lower at first, but you are not paying down the loan, and the repayment rises when the interest-only period ends. Principal and interest repayments cost more each month but reduce what you owe from the start.
Consider a buyer in Redhead who borrows $600,000 and needs lower repayments to cover the early months in their new home. The figures below use an illustrative rate of 6.75% p.a., not a current offer.
- Interest only: about $3,375 a month.
- Principal and interest over 30 years: about $3,892 a month.
- After a five-year interest-only period, principal and interest over the remaining 25 years: about $4,145 a month, and the balance is still $600,000.
The buyer sees that the $517 monthly saving in the early years turns into a repayment about $253 a month higher than the 30-year figure, and about $770 a month higher than the interest-only repayment, once the loan switches over. They choose principal and interest with a linked offset account, and park their savings there to reduce interest while keeping the cash accessible. The outcome is a repayment they can plan around and a balance that falls from day one. The trade-off is a tighter monthly budget in the first few years. You can test your own numbers with our loan repayment calculator.
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Fixed, Variable or Split: Which Rate Type Suits You?
A variable rate moves with the lender's decisions, a fixed rate stays the same for a set period, and a split loan does a bit of both. The right choice depends on how much certainty you need and how much flexibility you want.
A fixed interest rate home loan gives you a repayment you can budget around for the fixed term. The trade-off is that extra repayments are often capped, and leaving the loan early can trigger break costs. A variable rate usually allows extra repayments and offset accounts, but your repayment can rise if the lender lifts its rate.
A split rate lets you fix part of the loan and leave the rest variable. For example, you might fix half for certainty and keep the other half variable so your offset account and extra repayments still work. The downside is that you carry the limits of both loan types.
Forgetting Upfront Costs Beyond the Deposit
Your deposit is only part of the cash you need, because duty, legal fees and possibly lenders mortgage insurance (LMI) also apply. Work these out before you commit to a property.
In New South Wales, the duty on property transfers is called transfer duty, often known as stamp duty. Our stamp duty calculator gives you an estimate for a purchase. Grants and duty relief may be available for first home buyers, and eligibility rules change, so check the current rules with Revenue NSW and read our first home buyers page for how we help.
LMI is a one-off insurance cost that can apply when your deposit is small compared with the property's value, which is measured by the loan to value ratio (LVR). It protects the lender, not you, and it is usually added to your costs or loan. A larger deposit can reduce or remove it, but waiting to save more also means staying in your current situation longer. If you are weighing up whether to buy now or save more, talk it through with someone before deciding.
Buying Without a Local Broker in Your Corner
A local broker can explain your options in plain language, handle the paperwork and keep you informed from application to settlement. We are a finance and mortgage broking business, and we work with Redhead locals, as you can see on our Redhead mortgage broker page.
We will look at your income, savings, other debts and plans, then compare loans that fit. Brokers can be paid by the lender once a loan settles, so ask any broker how they are paid and which lenders they compare. Buying a home is a big step, and you should not have to work out the loan on your own.
If you are ready to buy in Redhead, call one of our team or book an appointment at a time that works for you through our booking page. We will help you find a loan that fits your budget and your plans, so you can make an offer with confidence.
Frequently Asked Questions
Is the interest rate the only thing to compare on a home loan?
No. Fees, features such as a linked offset account and the comparison rate all affect what you pay. A loan with a slightly higher rate can suit you if its features match how you manage money.
Why get home loan pre-approval before house hunting?
It shows a realistic loan amount before you start inspecting, so you can make offers with a clear budget. It is a conditional assessment that can expire, so the lender will still check the details at formal application.
What is the downside of an interest only home loan?
You are not paying down the balance during the interest-only period, and repayments rise when it ends. At an illustrative 6.75% p.a. on $600,000, repayments move from about $3,375 to about $4,145 a month after five years.
What upfront costs should I plan for besides a deposit?
Transfer duty, legal fees and possibly lenders mortgage insurance can all apply. Use a stamp duty calculator for an estimate and check current first home buyer rules with Revenue NSW.
