The difference between a good home loan and a bad one

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Many borrowers simply want a home loan with the lowest interest rate possible. It makes sense: a low-interest home loan can mean lower repayments and less interest charged over the lifetime of the loan.

But while interest rate is a very important factor when weighing up your mortgage options, there is much more you need to consider when comparing home loans.

Why interest rate isn’t the be-all and end-all

Theoretically, choosing a home loan with the lowest interest rate equals the most affordable mortgage. In reality, a low-interest home loan may not come with the features or flexibility you need, and it may not be the cheapest option either.

For example, some home loans come with a low introductory interest rate that reverts to a standard, higher interest rate after a set period. A home loan might also have a low interest rate but high fees, which can increase your monthly repayments and the total cost of the loan.

Additionally, not all home loans are available to all borrowers. Depending on the lender’s borrowing criteria, a home loan with the lowest interest rate may only be offered to people who tick specific boxes (like putting down a 20% deposit or buying to occupy rather than invest).

A ‘good’ home loan is one that’s right for you

Ultimately, a ‘good’ home loan suits your circumstances and a ‘bad’ home loan doesn’t. That’s why loans with higher interest rates may be more suitable than loans with lower interest rates.

Affordability will almost certainly be a consideration when weighing up your options, but it’s also a good idea to consider:

Borrowing criteria

Remember that you may not qualify for some home loans, depending on your circumstances and the lender’s borrowing criteria. Focusing on home loans you’re likely to be approved for will save time in finding the right mortgage.

Product features

It’s important to choose a home loan with features that make it easy for you to manage and repay your loan. This might include:

  • An offset account, which is a transaction account linked to your home loan. The balance of your account is ‘offset’ against your loan balance, meaning you pay less in interest.
  • Repayment holiday, which is the option to take a break in repayments or temporarily reduce your repayment amount.
  • A redraw facility, which allows you to borrow back money you’ve already repaid.
  • Extra repayments, which are beneficial if you want to pay off your loan faster.

Customer service

Consider a lender’s customer service reputation and which self-service options are important to you. Research by Roy Morgan found that mobile and internet banking led to the highest customer satisfaction ahead of branch visits. With this in mind, you might prioritise finding a home loan that can easily be managed online rather than in person.

Your financial and personal goals

Your home loan should help make it possible to achieve your short-term and long-term goals. For example, you might refinance and switch to a loan that better suits your current financial circumstances. Or if you want to pay off your mortgage faster, you might choose a home loan that allows extra repayments.

The bottom line

Once you throw all these factors into the mix, it’s easier for you to decide which home loans might be good for you and which might be bad. Above all, finding a home loan that suits your circumstances is key to achieving your goals.

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