Listen To This Story About Home Loans.
Home loans come in all shapes and sizes, and every bank has their own varieties too. Just how many there to choose from was brought home to me after talking to a couple about to buy their first home.
As a mortgage broker I am used to talking about home loans every day of the week and it is easy to underestimate the complexity when it comes to explaining home loans to clients, especially new home buyers.
I constantly remind myself to stop using jargon and use easy to understand language to explain the ins and outs of things like variable rates, fixed home loan rates, lines of credit, split loan facilities, professional packages and interest only loans.
In fact, there is very little point in explaining all home loans because most new borrowers just want to get the cheapest loan they can.
This can be a mistake however because it’s really important to choose the best home loan to suit your individual circumstances first and then decide on the cheapest rate for the type of loan you want.
For instance, some of the cheapest home loans on the market are what you might call frill free loans. They have a low rate of interest, are usually very will interest rates, and they only have the option of principal and interest repayments. In many cases they also carry a monthly fee and offer very little to borrowers apart from a cheap rate.
It might surprise you to find that you may well be better off choosing home loans with a slightly higher rate of interest with no ongoing fees and charges because, in the medium term, they may in fact cost you less! I have explained his earlier so it might help you if you read this post first.
If you have subscribed to my Home Loans Shortcuts you probably don’t need to read much further because you already know:
- How to choose a good home loan.
- What you need to apply for a home loan.
- Questions you need to ask your mortgage broker.
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But, let’s continue the story.
These borrowers had visited no less than three banks looking for explanations about the home loans each institution had to offer. They were simply trying to get a good idea of what was available for them so they could make an informed choice. And, of course, the cheapest loan they could find.
After four days into their investigation, a friend suggested they ring me.
I asked them what they had discovered and they told me they were absolutely confused and still couldn’t tell the difference between one bank and the next. Even their own bank, with whom they had been banking for the last five years, was not able to convince them about the correct product.
I suggested to them that we go over their current circumstances and map out a plan about which features of a home loan might be attractive to them, and which ones we should disregard. In order to do this we went through a short 30 minute process where I know it all their needs and requirements both for the foreseeable future and the medium term (the next five years).
After sifting through all the information I was able to highlight the features of a home loan that might benefit them, and then narrowed down their search to a few banks that would be able to offer them a suitable home loan.
One of the surprises they found was that none of the three banks they had visited were able to provide a competitive product. In fact, the cheapest loans were from a nonretail bank.
They pointed out to me that they could have probably discover the same information if they had been astute enough to do some online research. Whilst I agreed with them I showed them that the information on some nonretail bank websites would not have alerted them to the suitability or of some other products that were not highlighted there.
In the end, we all became aware of the fact that three or four days solid research by these borrowers actually led them up the garden path and that simply by talking to your mortgage broker of their choice (preferably me), they could have avoided all the angst and worry and got the job done in an hour or so.
Not that I am tooting my own trumpet or anything!
So, what were the key points we went over during a 30 minute interview? Here is a list of the points were covered.
- We established an accurate assessment of their borrowing capacity, and we coupled that with their expected lifestyle expenses. We did this to work out how much they could comfortably afford in monthly rate home loan repayments without compromising their lifestyle.
- We clarified their cash position and factored in the impact of the first home owners grant, the savings they had in their bank account, how much cash they want to keep in their account after the home loan was settled and how much cash they should keep aside for incidentals and unexpected items.
- We assessed what changes they were anticipating in their lives over the next five years, including the possibility of starting a family, educational and ongoing expenses for their education and how long they intended to stay in the home.
- We examined the various types of loans that would be appropriate for them including the flexibility to make extra repayments, the possibility of reverting to interest only should the circumstances require it, the inappropriateness of lines of credit (they did not qualify for one), and looked at the possibility of splitting their loan into two parts to take advantage of a fixed rate and a competitive variable rate at the same time.
Once we have these points clear it made the decision as to which home loan war is the most appropriate quite a simple process.
They realised that interest rates are not the best criteria when it comes to deciding which is the best home loan and that there is no point being loyal to your bank if they can’t provide the product you really need.
One thing that really stood out during a discussion was that they had not realised the possibility of negotiating a better deal than the ones the banks advertise. I showed them how even banks have monthly specials and home loans sales which borrowers can take advantage of and that with the proposed abolition of exit fees it might be feasible to change banks sooner than they thought.
I think the thing that impressed the most was working out the real cost of a loan rather than blindly accepting what the bank says. By taking them through my five-year plan approach they realised how easy it is to compare home loans free of the hype that the bank’s marketing throws at you.
I guess it’s easy for a mortgage broker to look at home loans with a critical eye but it is so easy for new borrowers to get caught up in the details.
