Net yourself the right deal

Home buyers who chase a better deal on their home loans can save tens of thousands of dollars in repayments. And with better home-loan regulation and greater use of the internet in finding loans, it has never been easier to compare what is on offer.

A spokeswoman for RateCity, Michelle Hutchison, says someone with a $300,000 loan paying a variable rate of 6.35 per cent would save $28,000 over 30 years by switching to a loan with an interest rate of 5.95 per cent.

With the downturn in housing activity, lenders are bending over backwards to keep their existing home-loan customers and to attract new customers.

''Homebuyers can take advantage of this by finding a good-value home loan by comparing online and then negotiating hard to potentially save thousands of dollars,'' Hutchison says.

The internet is a low-cost way of lenders' distributing loans and some of the best deals available are online, says the managing director of financial comparison website Mozo, Rohan Gamble. Some of them come from the banks themselves.

''The banks are competing aggressively with online-only loans, recognising that many consumers are comfortable interacting online,'' Gamble says.

The banks are using their subsidiary brands with rates that are far lower than their traditional loans.

However, the online offerings are not being pitched at first-time buyers, but to those with larger loan amounts who have substantial equity.

At the time of writing, UHomeLoan, an online-only mortgage, has a market-leading variable interest rate of 5.62 per cent. UHomeLoan is part of UBank, which is owned by NAB. However, the loan is only available to those refinancing their existing mortgage as they are regarded by lenders as lower risk.

UHomeLoan has a call centre available for those who need help in completing an online application. BankWest's online-only loan, called Online Home Loan, has an interest rate of 5.79 per cent and is available to those with at least 80 per cent equity in the property. BankWest is owned by the Commonwealth Bank of Australia.

The accompanying table from Mozo ranks the loans by the ''comparison interest rate'' on $330,000, the average loan-size nationally, taken over 25 years.

The comparison rate usually differs slightly from the advertised interest rate as it attempts to capture most of the other costs of the loan.

EASIER TO COMPARE

After the government removed exit fees for all loans taken out from July 1 last year, comparing loans on interest rates alone has become straightforward. With lender's not able to lock borrowers into their loans with exit fees, more of the actual costs of the loans are reflected in the interest rates themselves.

Lenders used to offer ''honeymoon rates'', in which the interest rate was discounted for a limited time, knowing they could keep the borrowers at the end of the honeymoon period with exit fees.

Honeymoon-rate loans have mostly disappeared, Gamble says.

''For consumers the home-loan market is now more straight-up - what you see is what you get,'' he says.

Gamble says online loans tend to be non-negotiable, almost by definition, because the discounts are already factored into the interest rate and the application process is largely computer-driven. However, the banks - with their traditional variable-rate loans - are ''absolutely negotiable'', Gamble says.

Providing the borrower has a good credit history and has a good deal of equity in the house, the larger the loan the bigger the discount.

FIRST-TIMERS

First-home buyers need to be careful. If they can save more than 20 per cent of the purchase price of the property as a deposit, they can avoid lenders' mortgage insurance.

Though it can cost thousands of dollars and is paid by the borrower, it covers the lender for any shortfall that may occur if the lender has to sell the house.

A first-home buyer with a $15,000 deposit on a $300,000 house pays slightly more than $6000. While it is a one-off cost, most lenders add the cost to the loan. Taking into account the compounding of interest over such a long period, the true cost of the $6000 premium is many times that. If the borrower refinances (switches loans to finance the same house) and they still have equity in the house of less than 20 per cent, they will usually pay for lenders' mortgage insurance again.

Most lenders allow a family member with substantial equity in their home to be a guarantor for the first-home buyer to avoid mortgage insurance. The guarantor is financially liable if there is a default.

A financial planner and director of WLM Financial Services, Laura Menschik, says if a first-time buyer believes they are getting a good buy, then paying for the lenders' mortgage insurance may be an acceptable tradeoff.

On the other hand, house prices are steady and there should be no rush to buy. First-timers have the time to save for a bigger deposit, she says. ''Sometimes it is like pulling teeth to get someone to save $10 a week, let alone $100 a week.''

LOAN TYPES

RateCity says there is an increase in the number of home loans requiring smaller deposits as lenders respond to weak demand for home loans. The potential problem with such loans is that any subsequent dip in house prices leaves homebuyers with negative equity in the house. They may be able to borrow more with a loan that requires only a very small deposit but leave them with little buffer if something should go wrong.

A senior financial analyst at research and ratings firm Canstar, Mitchell Watson, says anyone needing a loan of more than $250,000 and who has substantial dealings with a bank should consider a professional package.

The borrower will receive discounts on the lender's other financial products. The interest rate will usually have a discount to the standard variable rate, but there will usually be an annual fee for the package. He says those with simple banking needs and borrowing smaller amounts may be better off with a basic home loan.

Fixed versus variable rates: which is best?

Most economists think the Reserve Bank of Australia has a bias towards cutting interest rates as the mining boom cools and inflation remains contained. So those thinking of taking a fixed-rate mortgage have to be careful.

Mitchell Watson of Canstar says the big banks' standard variable or advertised rate of interest is 6.81 per cent. But most people are paying about 6.11 per cent - a 0.7 percentage point discount on a loan of about $250,000. However, for those with bigger mortgages, the discount can be even greater, Watson says.

He says the major banks' average interest rate on a three-year fixed-rate loan is 5.87 per cent, or 0.24 percentage points less than the variable rate most people are paying.

''If we were to see one more interest rate cut, the three-year fixed and variable rate that most people are paying would be about the same,'' Watson says. If the cash rate were to fall further, variable rates would become cheaper. But three years is a long time to fix and anything could happen with interest rates over that time, he says. If the economy picks up, interest rates could even go higher.

Borrowers could consider a 50/50 split between variable and fixed to spread the risk, Watson says.

They also need to think about their plans for the next three years. If they are thinking about upgrading their house and borrowing more, fixing may not be the best option, he says.

The story Net yourself the right deal first appeared on The Sydney Morning Herald.

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