Avoid These 5 Mistakes When Buying a House With a Loan

Many costly home loan mistakes can be avoided before you commit to a loan. They come from choosing a loan on the headline rate alone and not on how it fits your plans.

Whether you are buying your first home or your third, the same five slip-ups come up again and again. Here is how to spot each one and what to do instead.

Should You Get Home Loan Pre-Approval Before You Look at Houses?

Yes. A home loan pre-approval tells you roughly how much a lender may let you borrow, so you can shop within a realistic price range. It is not a final approval, and it usually comes with conditions and an expiry date that varies by lender.

The mistake is house hunting first and finding your limit later. A lender looks at your income, your living expenses, your debts and your deposit. Credit card limits count even if the card is empty, so closing unused cards before you apply for a home loan can lift the amount you can borrow. You can get a starting figure with our borrowing capacity tool before you speak to anyone.

The trade-off is that a pre-approval involves a credit check, and applying with several lenders at once can leave a mark on your credit file. A broker can compare lenders for you and approach only the one that suits your situation.

How Do You Choose Between Variable, Fixed and Split Rate Loans?

Choose the rate type that matches how much certainty you need and how likely you are to make extra repayments or sell early. A variable rate moves with the lender's decisions, a fixed rate stays the same for a set period, and a split rate divides your loan between the two.

Each one has a cost. A variable rate can rise, which lifts your repayments. A fixed rate gives you a steady repayment, but break costs may apply if you pay the loan out early, and many fixed loans limit extra repayments. A split loan gives you some of both, though you carry both sets of limits on different parts of the balance.

As an example, a buyer who expects a baby and a drop in household income might fix half the loan for certainty and keep the other half variable so they can add extra repayments when money allows. A buyer who may sell within a couple of years might stay variable to avoid break costs.

Is an Interest Only Home Loan a Good Way to Lower Repayments?

Interest only loans lower your early repayments, but you do not reduce the loan amount during that time. Once the interest only period ends, repayments rise because you have fewer years left to pay off the same balance.

Here is an illustrative example at 6.75% p.a. on a $600,000 loan over 30 years. These figures are for comparison only and are not a quote.

• Principal and interest from day one: about $3,892 a month.
• Interest only for five years: about $3,375 a month.
• Principal and interest over the remaining 25 years, after that interest only period: about $4,145 a month.

The buyer saves about $517 a month for five years, then pays about $253 a month more than they would have under principal and interest from the start. They also still owe the full $600,000 at that point, so they have built no equity through repayments. For a home you will live in, principal and interest is usually the more direct path to owning the house outright. Use our mortgage repayment calculator to test your own numbers.

How Does a Linked Offset Account Work on a Home Loan?

An offset account is a transaction account linked to your loan. The money in it is subtracted from your loan balance when interest is calculated, so you pay interest only on the difference.

If your loan is $600,000 and you keep $20,000 in the offset account, interest is worked out on $580,000. Your money stays accessible, which makes it handy for an emergency fund or your pay.

The trade-off is cost. Some lenders charge a package fee or a slightly higher rate on loans with a mortgage offset, so it only pays off if you keep a meaningful balance in the account. Ask the lender what the feature costs per year before you compare it with a basic loan.

Why Compare Home Loan Packages and Features, Not Just the Rate?

The interest rate is only one part of what a loan costs you. Annual fees, rate discounts that apply only to a package, redraw access, extra repayment limits and portability all change the real cost of the loan over time.

A loan with a low advertised rate can lose its edge if it carries a yearly fee and no offset. A slightly higher rate on a loan with a free-flowing offset and no extra repayment limits may suit a buyer who plans to pay the loan down quickly. Also check whether the loan is portable, which can matter if you expect to move.

If you already hold a loan, our loan health check is a useful starting point for seeing whether your current features still fit. At Granny Flat Loans, we compare home loan options from banks and lenders across Australia, so you see how rates, fees and features stack up side by side.

If you would like help matching a loan to your plans, call one of our team or book an appointment at a time that works for you.

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