Looking for a mortgage? Tips and traps.

Factors to consider
Before looking for a mortgage it’s important to ask yourself - what are your finance needs and what features will you really use? You don’t want to be paying for features that you don’t need. Home loans have many and varied features. You may find that you will be financially better off with a mortgage that does not have the lowest interest rate or no establishment fees; but has features that work with your lifestyle.

Work out the size of the deposit that you can afford. Where you are borrowing more than 80% of the value of the property you will commonly pay lenders mortgage insurance. This can cost several thousands of dollars. Be wary of where this insurance is not charged. It will be incurred by the lender and bundled into higher ongoing fees.

Features to look for
Flexibility is important where your circumstances could change during the term of the loan. Your ability to make additional repayments at no extra cost and using the internet, telephone or ATM’s to make payments can be valuable.

Logic tells us that whilst there are12 monthly payments in one year, you will pay more off your loan by making 26 fortnightly payments at half the monthly rate. You are one month ahead at the end of each year. Be wary of loans that reduce the fortnightly payment amount to equal the same annual repayment for 12 monthly payments and loans that extend the term for this feature. The aim is to have paid more than the 12 month repayment value, as well as gain the convenience of matching repayments with payslips.

Check to see you will have the ability to fix your interest rates in the future. Honeymoon rates are attractive in the first year of the mortgage but you may find that you are unable to fix your interest rate after the honeymoon period and therefore will be subject to a higher variable rate.

When you are considering borrowing for investment in the future you will need to have the facility to split loans to protect the tax benefits of deductibility of the interest on the investment portion. This could involve establishment fees in some cases, but for others the feature may already be in place.

Offset accounts and redraw facilities are important to provide the ability to repay debt faster. The best offset accounts are 100% offset of the interest being charged for every dollar in the account. Some accounts will offset less than 100% of interest cost per dollar deposited or only begin to offset the loan interest when the balance is above a certain value. Redraw allows you access to payments made over and above the payments you are required to make. They can be used like a safety net whilst reducing interest against the loan at the same time.

What about the Fees?
Banks and other institutions know that people will refinance their loans. For this reason, you need to explore the exit costs before you sign the loan agreement. You should ask for the total costs of the loan including the exit fees, discharge or settlement costs. No establishment fees and a low rate is not the whole story.

Remember, like buying a car, that the first fees mentioned by the lender are most likely not the best offer you can get and you are in a position to try to negotiate a better outcome. If you don’t ask you will never know.

Ask for a comparison rate
The advertised rate that has attracted you into the lenders office is not the rate you should use to compare the costs of the finance. It is possible that a lender may have a higher advertised rate but lower comparison rate than another lender. The comparison rates help consumers identify the true cost of a loan. It's the rate that includes both the interest rate and fees and charges relating to a loan, reduced to a single percentage figure.

Once you have worked out the structure of the loan, the features you require and have a comparison rate - you are ready to make a decision.

Broker or no Broker – Is that the question?
Selecting a mortgage provider remains a challenging task. A broker is employed to represent your interests in finding a suitable and competitive loan. Brokers are useful to get the structure right and are a convenient way to quickly canvass the options.

7 tips for selecting a broker:

1.    Ask the broker what lenders they have on their books. Brokers vary from those with 2 or 3 providers to those who consult a base with 20 or more providers.

2.    What fees do the brokers charge? Ask the broker to clearly identify the fees and charges you will be incurring by using their service. Some have no fees and receive a commission. Others will charge a one-off fee and may rebate or refund commissions.

3.     Ask the broker how they compare loans to determine what is best for you. If they are unable to explain the method they use then beware – commission may play a role.

4.    Before you contact a broker, check they're registered with the Australian Securities & Investments Commission.

5.    Does the broker have professional indemnity insurance? Make sure they do.

6.     Ask what privacy guidelines they follow when handling your information.

7.     Ask what happens after the loan is approved.