Getting a lower interest rate is one of the best ways to save on your loan. Even a difference of a few basis points saves you thousands over a 30-year mortgage. Here are some tips to help you compare rates among different lenders:
Floating versus fixed rates.Floating or variable loans usually have lower rates and offer more flexibility than fixed loans. But you can find very competitive fixed rate loans too. If rates rise while you’re still on a fixed loan, you may end up with a more competitive rate.
Introductory rate discounts. Look out for loans with discounted introductory interest rates. These might be some of the lowest loans on the market. Just watch out for fees and be ready to switch if your rate jumps up.
Non-bank lenders. Loans from smaller, non-bank lenders are more likely to have lower rates. But the mortgage market is so competitive that even the big banks are offering comparably low rates.
Negotiating. Once you’ve chosen a mortgage you can ask for a discount. It never hurts to ask.
2. Get a loan with low fees
Most mortgages come with fees. These are separate from the interest rate and your repayments, but they are calculated into a loan’s comparison rate.
Upfront, one-off fees (like application fees) can be expensive. You should also watch out for smaller, ongoing fees that some lenders charge monthly or annually.
So should I avoid fees at all costs?
Not always. You need to crunch the numbers and work it out for yourself. If a loan has a low rate and features you need (like an offset account), then it might be worth paying the fee.
Some fees only come at the end of the loan or when switching lenders. Keep this in mind if you’re planning to refinance (which you probably should).
3. Get features that save you time (and money)
Home loans with the lowest interest rates often have fewer features. But the right features can help you get more out of your home loan and save you money. It depends on your strategy.
Offset accounts. An offset account is a transaction account linked to your home loan. It reduces the amount of interest you’re repaying. For example, if you borrow $200,000 and save $10,000 in a 100% offset account, you will only pay interest on $190,000. You can use the offset account funds if you need to spend them, but then you’ll have to pay interest on the full amount.
Loan portability. This feature lets you move your loan to a new property without the high costs of exiting a loan and taking out a new one.
Unlimited extra repayments. Some lenders charge penalty fees when you make extra repayments. The most affordable home loan could be the one that lets you pay it off in your own way, so watch out for repayment fees. Note that while most lenders allow you to pay variable rate home loans off early with no problem, fixed loans will charge a penalty fee known as break costs.
4. Save a bigger deposit
The bigger your deposit, the less you have to borrow. This makes for cheaper repayments. In some cases, a bigger deposit unlocks lower rates. Most mortgages require a deposit between 5% and 20% of your property’s value. If you borrow with a deposit that is less than 20% of your property’s value, you may need to pay lenders mortgage insurance on top of your loan.
Having at least 20% of your property’s value as a deposit saves you money. If you have a 30% deposit, you could get an even lower interest rate, but that’s unrealistic for many home buyers.
5. Take a closer look at your repayments
Your repayment structure has a big effect on the cost of your loan and it’s important to understand how interest is charged. Principal and interest loans result in bigger monthly repayments but are cheaper in the long run. Interest-only loans have much cheaper repayments during the interest-only period but higher repayments afterward. This costs you more over time.
Shorter loan periods
The faster you pay off a home loan, the less interest you pay over time. So even though the repayments for a 25-year home loan might look high compared to those of an identical 30-year home loan, the savings would be higher.
Check out the difference in the total cost of two loans below:
A 25-year mortgage has higher repayments, but works out to be cheaper in the long run because you pay less interest.
I have a few more questions about getting the cheapest home loan
Online lenders traditionally have the lowest home-loan rates. They have lower costs because they don’t operate branch networks. But today, many traditional banks can match or even exceed the competitive home loans offered by these cheaper home-loan providers, so it pays to look at all lenders when seeking a cheap loan.
Some lenders offer special loans tailored to first home buyers that are worth checking out. You may be eligible for the First Home Loan scheme, or the First Home Grant if you’ve been contributing to KiwiSaver.
And don’t forget about first home buyers’ grants and financial help offered by the government.
Saving up for your home loan deposit is a serious challenge for everyone. However, there are ways to trim your expenses, build your deposit and find home loans that don’t need large deposits.
You should always be comfortable with the lender you’re planning on going with. If you’re not aware of a lender, try calling them to find out about the company and their service level before lodging an application. Speak to previous customers or read customer reviews on reputable sites.
Keep in mind that little-known lenders might be funded by a larger bank.
Richard Whitten is a senior writer at Finder covering home loans and property. He helps everyone understand the ins and outs of mortgages so they can make smarter property decisions. Richard trained as a high school English teacher but found it easier to manage personal finances than a classroom full of kids. Before joining Finder, he edited textbooks and taught English to office workers in South Korea. Richard has a Bachelor of Education and a Graduate Certificate in Communication.
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