When choosing a home loan, it’s important to work out the features you need from your loan and how much it will cost you in fees.
How to compare home loans
The best way to compare home loans is to ask for a key facts sheet from different lenders. The key facts sheet will give you the information you need, in a set format so you can directly compare features and fees.
The key facts sheet will tell you the total amount to be paid back over the life of the loan, repayment amounts, fees and charges.
It will also give you a personalised comparison rate to help you check the total cost of a loan against other loans.
Credit providers must give you a key facts sheet for a home loan, if you ask for one (but not for interest only loans or line of credit home loans).
Principal and interest loans and interest-only loans
Most people take out a principal and interest home loan, where you make regular payments against the principal (the amount borrowed) as well as paying interest. This type of loan is designed to be repaid in full over the life of the loan.
A credit provider will usually offer a number of different principal and interest loans, with a range of features such as a redraw facility or an offset account. Generally the more features a loan has the higher the cost will be.
The loan is usually repaid over an agreed period of time, such as 25 or 30 years. Use our mortgage calculator to give you an indication on how much you can borrow or how much your repayments might be.
Interest-only loans
As the name suggests, your repayment amount will only cover the interest on this loan. The principal amount you borrowed will not reduce unless you choose to make extra repayments. Paying interest only may cost you more over the term of the loan because you’re paying interest on a principal that doesn’t reduce. See interest-only loans for more information.
Variable, fixed and split rate home loans
Lenders will usually offer several different interest rate options:
- Variable interest rate – The interest rate on your loan can go up or down, usually in line with a change to the official cash rate (but lenders may make changes independently of cash rate changes).
- Fixed interest rate – The interest rate on your loan will remain unchanged for the fixed period. This is usually 2-5 years, after which your loan will usually revert to a variable rate loan.
- Split loan – This is where part of your loan is variable and part is fixed.
See interest rates for a more detailed description and variable versus fixed home loans for the pros and cons of each option.
Making extra payments
Paying a little bit extra will save you interest and get your loan paid off quicker. However, most fixed rate loans will limit the amount of extra payments you can make each year. There may also be penalties for paying out a fixed rate portion early.
Redraw, offset and line of credit
Offset account
This is a savings or transaction account linked to your home loan. Your account balance is taken off the amount you owe on your home loan, reducing the amount of interest you pay.
For example, if you have a home loan of $100,000 and a balance of $20,000 in your offset account, you only pay interest on $80,000.
If the balance of your offset account is low, the additional costs may outweigh any benefits you get from having it. Be realistic when calculating the expected benefit an offset account may give you.
Redraw facility
Having a redraw facility allows you to pay extra money into your loan that you can take out (or redraw) later if you need it.
The extra money you pay into the loan reduces your loan balance which reduces the interest you pay. Your loan balance will still reduce each month according to the terms of your loan.
Credit providers may impose conditions or a fee to redraw funds. You should check what conditions and charges apply to your loan.
Loans that allow you to have your whole pay credited to the loan account and pay bills or use EFTPOS to withdraw funds are operating with a redraw facility.
Line of credit loans
A line of credit is a loan where a credit limit is set and you can spend up to that credit limit.
Typically you would have your wages paid into the account and pay your bills and other expenses out of the account.
The limit on the line of credit is fixed and does not reduce as you repay the loan. This means you can always draw up to this limit. You will need to repay the loan in full eventually, usually by a specified date, which you will need to plan for.
This type of loan suits someone who is a disciplined and careful budgeter who may have irregular income.
Extra features can mean extra costs
Features like redraw, offset and line of credit can be useful but they may come at a cost. Loans with these features may have a higher interest rate or a product fee, so think carefully about which features you really need.