How to Assess Home Loan Features and Interest Rates: A Tic:Toc Guide

Choosing the right home loan is an important decision that can have a big impact on your financial future. But here's a secret: home loans aren't as complicated as you think they are. In this guide, we'll take you through the steps to help you assess home loan features and interest rates.

The interest rate

Let's start with the interest rate. This is the rate at which your lender charges interest on top of the principal of your loan (how much you've borrowed). A lower rate means smaller monthly repayments.

Conversely, a higher interest rate can mean higher monthly repayments and more money paid in interest over the life of the loan.

Some loans have variable interest rates which are subject to change. Others are fixed, which means your rate won't change for a set number of years. A split loan is when you can apply a variable rate to a portion to the loan balance, and fixed to the remaining balance – the best of both worlds, if you’re not sure which way to go.

Repayment types

There are two ways to repay your home loan. Most borrowers make principal and interest repayments, where they repay the principal and the interest together. Your monthly repayments can be heavy, but you're repaying your debt from day one.

Interest-only repayments allow you to just repay interest charges at the beginning of the loan. These repayments are much smaller, but the catch is you will need to pay off the principal later and it will cost you more in the long run.

Extra repayments

If you have the money to make extra repayments on your home loan, for example, if your salary increases or you come into some extra cash you can put this toward your loan and pay it down faster, which means you'll pay less interest over the life of the loan.

But some home loans, especially fixed-rate products, limit the amount of extra repayments you can make per year, and or charge a break cost if you decide to end your fixed term early. It's worth checking this when looking at home loans.

An offset account

An offset account functions like a savings account attached to your home loan. The money in it is yours and you can save or spend it as you like. But as long as the money is sitting there, it offsets the principal on your home loan.

In other words, if you put $20,000 in your offset account, it essentially looks like you've paid an extra $20,000 off your loan principal. This means you pay less interest. If you kept that $20,000 in the offset account, you'd actually end up paying off your home loan faster.

You can spend the money when you need it, but then your principal will go back to the full amount, meaning your interest repayments will go up again.

Pair an offset account with a Tic:Toc fixed rate home loan to give your savings a super boost. Tic:Toc’s offset account is available for $10/mth.

A redraw facility

Don’t want to pay extra for an offset account? Most home loans come with a redraw facility, and these are usually free (make sure to check with your lender, but Tic:Toc’s is free). A redraw facility allows you to access or ‘redraw’ any extra repayments you have made on your home loan. It takes a bit of time for you to be able to access the money (usually 1 to 2 business days), so keep this in mind when planning your finances.

Loan-to-value ratio (LVR)

This is a confusing industry term that is really just a number for the portion of the property’s value that you’re borrowing. The LVR tells you how much you need to have saved as a deposit compared to the value of the property you're buying.

Home loans generally require a minimum LVR of 80%. This means you’ll borrow 80% of a property's value, and you’ll need to save a 20% deposit to make up the difference. For example, if the house you're buying costs $500,000, you will need a $100,000 deposit (20% of $500,000). Note, your deposit amount is separate from the upfront costs you’ll need to cover, like stamp duty and other government fees.

Some home loans let you borrow up to 95% of a property's value. These usually require you to pay Lender’s Mortgage Insurance (LMI) – an insurance premium that protects the bank in case you default on your loan (that’s right, it’s not there to protect you). Some lenders will also couple this with a higher interest rate because taking on a loan with a lower deposit could be considered higher risk for them.

LMI can cost you several thousand dollars or more, depending on your deposit size and the price of your property.

But if you've only got a 5% deposit, a high LVR means you could get a home loan sooner rather than later.

It’s worth seeking independent financial advice to understand if getting a high LVR loan meets your financial goals, or if you’re better off saving up for a little longer.

Loan portability

If you're likely to sell your home and move before you pay off the home loan, then loan portability is very helpful. This feature means your home loan simply carries over to your new property without the need to refinance and thus re-apply for a whole new home loan.

Assess the fees and charges

Fees and charges vary between lenders and can add up over time. Be sure to consider any upfront fees, ongoing fees, or exit fees associated with the home loan. It's important to factor in these costs when assessing the overall value of the loan. Tic:Toc don’t charge any application or ongoing fees (unless you decide on an offset account which is $10/mth). You’ll just need to cover any applicable third-party and government fees.

At Tic:Toc, we offer a range of home loan options to suit all kinds of needs. Our online platform makes it easy to compare interest rates and loan features. Contact us today to learn more about how we can help you find the right home loan for your financial goals.