Ever wondered if there is a better way to compare home loans? How do you choose with any degree of certainty?
While there is no certain way to choose a home loan that will stand the test of time, there is a method I use to demonstrate to my clients how you can at least get a better idea. It’s called the 5 Year Test.
How Does The Home Loan Test Work?
Well, first we have to make some assumptions, based on experience and fact. Let’s look at these assumptions and the associated facts.
- We only know the interest rate that applies to a loan at the time we do the analysis. We don’t know whether the rate will change upwards or downwards in the future. Therefore that only way to compare loans is on the basis of the current interest rate.
- The average duration of a home loan in Australia before the borrower either sells or refinances is between 4 and 5 years. (http://www.essentialsofborrowing.com.au/~/ar/25/Mortgage-Refinancing-and-Mortgage-Management/Why-refinance-mortgage/MFAA) So the best term over which to compare loans is 5 years.
- Home loan products are shrouded in marketing terms that might be totally irrelevant to us. So, we have to exclude the fancy words and the outrageous claims from almost every bank, lender, building society and credit union. For example does “Home Loan of the Year” or “Home Loan Bank” of the year really mean anything? Absolutely not!
- The interest rate does not tell us the whole cost of a loan. There are application fees, associated bank charges and ongoing monthly and, in some cases, yearly fees to add in too.
Let’s now go forward with a dispassionate eye and a clear goal of calculating the only way to compare home loans. And that’s by calculating the exact total cost to us over the first 5 years of the loan.
Step 1.
Get your broker or lender to tell you the minimum monthly repayment required.
Step 2.
Ask if there are any ongoing fees and charges including monthly and yearly charges.
Step 3.
Ask if there are any fees for transactions you know you will be using. For example redraw costs. For these transactions you will need to estimate how many you will incur every month on average.
Step 4.
Add up all application fees, Mortgage insurance premiums where applicable (remember different banks use different mortgage insurers and the costs may vary slightly), bank settlement and legal fees and any fee charged by the bank or lender at settlement.
You can ignore Government fees and charges as these will be the same with all lenders.
Step 5.
Add up all the monthly costs obtained in steps 1 – 3 to get a true monthly cost.
Step 6.
Multiply the figure in Step 5 by 60.
Step 7.
Add the number obtained in Step 6 to the total figure obtained in Step 4. This is the FINAL FIGURE.
Now simply repeat this process for every loan you are considering and compare the final figures to see which loan is cheapest.
WARNING ON THE HOME LOAN TEST!!
You should only use this test after determining that the loans you are comparing are entirely suitable for you and that you can qualify for them. Only a qualified Mortgage Broker can assist you through this process. In other words get the assistance of your Broker to take you through the necessary qualifying steps first.
SAFEST OPTION
The safest option is to call me and I’ll go through it with you on the phone. Free of charge.
Call me on 1300 133 193 NOW
TO GET THE BEST HOME LOAN.
