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How To Choose Your Home Loan
Steps to Loan Selection
Introduction
Selecting a loan, particularly to make a major purchase such as a home, is a significant decision for anyone. It is important to think carefully about the nature of the financial commitment you will be making to ensure that you choose a loan which meets your needs and preferences.
This page sets out seven steps which True Choice Home Loans consider that you should follow. These steps will help you to compare choices available for the particular type of credit you are considering and to make the best selection.
7 steps to loan selection
| Step 1 | Determine your requirements Budget, purpose, amount, flexibility |
|---|---|
| Step 2 | Select the type of loan you require Home mortgage, overdraft, personal loan, credit card facility. |
| Step 3 | Decide how many banks you want to approach How much time do you want to put into the selection of a loan? |
| Step 4 | Collect and evaluate information True Choice Home Loans will help you to collect information and prepare a list of the features important to you, to help narrow the choices. |
| Step 5 | Talk to True Choice Home Loans Talk to us to obtain detailed information on repayments, principal reduction schedules, terms and conditions. |
| Step 6 | Make your choice of loan When you have understood and evaluated the loan options available to you, select the one which best suits your circumstances and preferences. |
| Step 7 | Apply for a loan Allow True Choice Home Loans to apply for the loan you have selected, making sure you carefully read the documentation. |
Example: Choosing a home loan
Step 1
Determine your requirements
The first step in making a good borrowing decision is to identify your needs and to consider your own personal circumstances.
The nature of the purchase to be financed is relevant. Most people give the highest priority to their housing, food and clothing and only spend on their budget. Remember, all purchases are about choosing what to do with your income.
What is your budget and how much can you afford to repay?
It is essential to determine your budget and how much of that budget can be set aside to meet repayments on a loan. In planning your budget it is important that some allowance is made for unexpected expenses such as illness or vehicle repairs.
Preliminary enquires
Don#8217;t be afraid to ask True Choice Home Loans about the level of loan repayments that might suit your particular circumstances, even if you are not ready to take out a loan. Alternatively, you might also speak to a financial adviser or to family and friends who have successfully made these types of decisions in the past.
How much do you want to borrow?
When you know how much you can afford in repayments you can decide how much to borrow. This will depend in part on interest rates as the higher interest rates are, the higher repayment levels on a particular loan will be. Interest rates may rise during the time you are repaying the loan, if the loan you choose is a variable rate loan (ie the interest rate is not fixed for the loan term). This is particularly important when interest rates are low.
You can cope with this by ensuring that you have a buffer in your budget to allow for the effect of possible higher interest rates. An alternative approach is to choose a loan option which fixes or caps your repayments for an initially fixed period, or provides for agreed manageable increases.
The period of time you wish to take to repay the loan will also affect the size of the loan you can afford. The longer the term of the loan the larger the amount you can borrow for a given level of monthly repayments. For example, monthly repayments on a loan will be lower if you are going to repay it over 25 years than if you are going to repay it over 15 years. It should be remembered that a longer term will, however, increase the total amount of interest that is repaid.
It is a good idea to talk to True Choice Home Loans when you are deciding how much you want to borrow and how long you want to take to repay the loan to ensure that what you want to do is acceptable to the lender. Do not commit yourself to the purchase of a house or other major expenditure without first ensuring that you will be able to obtain the finance required.
What flexibility do you need?
Lack of flexibility can be costly in the future if you find yourself tied to terms which no longer suit you. Some Banks have the ability to structure repayments to meet the different needs of customers and to allow for flexibility in future repayments. Borrowers are able to structure repayments to match changing circumstances.
For example, if you are a young couple buying your first home you might wish to pay off more of your loan in the early years when financial circumstances may permit, so a ‘high start loan’ may suit you.
Step 2
Select the type of loan you require
When you have identified your requirements it is time to consider the type of loan you want. There is now a large choice of different types of loans available and True Choice Home Loans will be able to find one that suits you well.
True Choice Home Loans has prepared information explaining different types of Home Loans which can be obtained from Loan Types. True Choice Home Loans has also provided information which explains the Loan Features of these different types of loans.
If your needs are more complex, discuss with True Choice Home Loans the options available to you.
Once you have determined the type of loan which suits your needs you should consider the various options to determine which features are most suitable for your particular circumstances and preferences.
For example, if you are about to buy a home, you might be interested in a home loan with a low rate for the first twelve months. This enables you to keep repayments low during a time when you are meeting many other expenses.
Alternatively, you might prefer to move straight onto a loan with a fixed rate for three or five years so that there is no uncertainty concerning repayments during these early years.
Step 3
Decide how many banks you want to approach
When you have determined your needs and considered the options available, you are ready to select your loan. True Choice Home Loans can reduce this task and provide further assistance for you.
Remember, there can be other benefits associated with choosing a particular lender. These might include such things as reductions in account fees, range and access to services provided, assistance with your business needs and the like.
True Choice Home Loans are able to assess over 170 lenders, and more than 2500 loan products.
Step 4
Collect and evaluate information
True Choice Home Loans will collect the information on the loans which you think meet your needs from advertisements, promotional literature and by telephoning and talking to banks.
To sort the information you have collected, True Choice Home Loans has developed a detailed process to compile a list of the features you consider important and the details of the various bank products against the relevant feature. We list the features in the order of their importance to you. When deciding what features are important to you, you might consider the questions in Step 5.
Getting complicated? True Choice Home Loans are able to compare and sort loans within minutes!
Step 5
Talk to True Choice Home Loans
Our personnel will discuss the loan with you and identify the costs and choices available. Some questions you might wish to ask are listed below.
What flexibility does the loan offer?
For what purpose can you get this type of loan (ie a car, holiday or house)?
What is the minimum and maximum amount that can be borrowed with this type of loan?
Do the loan terms and conditions suit your particular needs?
Is there a choice of repayment options?
Can you switch from a fixed to a variable rate and vice versa? Are there costs in doing so?
For home loans, is a mortgage offset account (which may provide tax benefits) available?
Is security required? If so, what can you provide?
What are the repayments and loan term?
What is the term of the loan (the length of time you can take to repay it)?
How much are the repayments and how frequently must they be made? Can you choose to make repayments weekly, fortnightly or monthly? What is the effect of these different choices on total interest paid and the time taken to repay the loan?
Can you vary your repayments for faster repayment (or make one-off lump sum repayments) if circumstances permit, or for slower repayment if there is a temporary decline in your income? Is there any penalty in doing this? Is there a benefit in repaying early?
If you choose a variable rate loan, what happens to repayments if interest rates change?
What is the interest rate?
Is the interest rate quoted a variable rate over the life of the loan (i.e. can it change without prior notice to you) a lower fixed rate for a short period, or a combination of fixed and variable rates? Is it capped to protect you against future interest rate rises and, if so, for how long does the cap apply? (Note: fixed rates cannot rise or fall during the fixed rate period; capped rates may not rise but may fall during the capped period.)
If you start your loan on a variable rate and want to move to a fixed rate later, can you do so and are there any costs?
If you take a special short term capped rate home loan, what options are available to you at the end of the capped period? Are there costs involved?
If you start with a fixed rate what are the options at the end of the fixed period? Are there costs at this time?
What fees apply?
What fees and charges (other than interest) apply?
- Application fee? Is it refunded / not charged if you do not proceed?
- Establishment fees? Does the establishment fee cover all bank fees including legal, valuation and lodgement fees?
- Early repayment fees?
- Annual or account keeping fees?
What government fees and charges such as Stamp Duties apply?
Will the bank require you to take out loan protection insurance?
How is interest calculated and charged?
The way in which a bank calculates and charges the interest on your loan will affect how much interest you pay:
- When is the repayment credited to your account? What happens if you make a repayment early or late?
- Is interest calculated daily (to get immediate benefit of repayments) or on some other basis (ie monthly)?
- How frequently and when is interest charged to your loan account?
Alternatively, True Choice Home Loans can get the answers for you!
Step 6
Make your choice of loan
Only you can tell what is the best loan for you as everyone has different requirements and preferences. True Choice Home Loans will be able to help you to understand and evaluate various loan options and to assist you in making your decision by giving you the detailed information you need in a personal interview.
When comparing different loans, consider the following points:
- What are the options over the course of the loan? True Choice Home loans will be able to show you the pattern of repayments on some types of loans and how the amount of the loan decreases over time. This will allow you to see the effect of varying the size and timing of repayments.
- Information is meaningful only if it is based on your needs and likely circumstances and not on assumptions which are not relevant to you. When comparing loans it is very important to talk to True Choice Home Loans, who will provide information that is relevant to you.
Step 7
Apply for a loan
When you have decided on the loan that suits your needs, True Choice Home Loans will make a loan application to the bank you have selected and discuss the documentation and any procedures to be completed prior to finalizing the loan.
Make sure that you carefully read the terms and conditions set out in the loan document and ask your bank to clarify any parts you are not sure about. If you feel you don’t understand the document, you should take it to your solicitor or financial adviser to have it explained to you before you sign
