How to choose a home loan lender, and how to judge the offer you get

The short answer

Start with which lenders would accept your circumstances, then compare price among the ones that would. Doing it the other way round — picking a rate and hoping the lender agrees — is how people collect declines.

Once you have an offer, judge it on the whole package: the rate, the fees, the structure, the features you would genuinely use, and what it costs to leave. Some lenders price the entry keenly and the exit rather less so.

What actually differs between lenders

Lenders look close to interchangeable from the outside. They are not, and the differences show up in places the advertising never mentions.

• Credit policy — how each lender reads self-employed income, overtime, bonus, commission, casual work and rent
• Property appetite — some lenders are cautious about small apartments, rural land, unusual construction or particular locations
• Deposit rules — where a deposit came from, how long it has been held and whether gifted funds are accepted all vary by lender
• Pricing behaviour — whether a lender prices sharply for new business, looks after existing customers, or negotiates case by case
• Product range — offset arrangements, redraw, splits and repayment flexibility differ across a single lender's own range as well as between lenders
• Service and process — who assesses the file, how documents are handled, and whether you can reach a person about it two years later

Only part of that is published anywhere. Much of it is known from having recently put files in front of the lender, which is the practical reason lender selection tends to be done by somebody who does it all week.

The kinds of lender, and who each tends to suit

It helps to know what sort of institution you are dealing with, because how a lender is funded and regulated shapes what it is able to do.

None of these categories is better than another. The right one is whichever accepts your circumstances on terms you can live with, and for plenty of borrowers that is a lender they had never heard of.

Whichever kind you end up with, check who regulates it and where a complaint would go. Every credit licensee in Australia must belong to an external dispute resolution scheme, and it is a fair question to ask before you sign anything.

Rate, comparison rate and fees

The advertised rate is the number every lender competes on and the one that tells you least by itself. It is the price of a package, and the package is where the differences hide.

A comparison rate exists to help with exactly that. It folds certain fees and charges in with the interest rate to produce a single figure, calculated on a standard loan amount and term set by regulation, so that two products can be lined up on the same basis.

What it does not capture is most of what makes a loan expensive or cheap for you specifically. Fees only some borrowers pay, the value of an offset arrangement you would actually use, break costs, and the rate a loan reverts to after an introductory or fixed period all sit outside it.

Then take the fees themselves one at a time, and ask who pays each and when.

• Application, establishment or settlement fees charged at the start
• Ongoing account fees, or an annual package fee bundling several products together
• Valuation and lender's documentation or legal fees, where they are not absorbed
• Lenders mortgage insurance, where your deposit position means it applies
• Fees to change the loan later — splitting it, moving between fixed and variable, or increasing the limit
• Discharge fees and break costs when the loan ends or is refinanced away

Many lenders allow certain setup fees to be added to the loan balance rather than paid at settlement. That can help with cash flow on the day, and it adds to what you borrow and therefore to the interest you pay across the term.

How the loan is structured underneath all of this — fixed against variable, offset against redraw, principal and interest against interest only — is its own subject. Our guide to home loan types sets out what each one is for before you try to price it.

Evaluating the offer in front of you

Urgency is the enemy at this point. A pre-approval with an end date, a settlement to meet and an agent asking questions all push you towards signing the first thing that arrives, and that pressure is exactly when a loan gets chosen badly.

1. 1

   Check what the offer is conditional on

   Most offers carry conditions — a satisfactory valuation, verified income, an acceptable property report, or the sale of something else. Read them, because an offer with unmet conditions is not an approval.

2. 2

   Confirm the structure matches the plan

   The loan term, the repayment type, whether it is fixed, variable or split, and whether any splits are set up the way you intended. All of that is far easier to correct before documents are issued than after.

3. 3

   Price the features you would genuinely use

   An offset arrangement, redraw or unlimited extra repayments are worth paying for if you use them and dead weight if you do not. Be honest about which of them describes you.

4. 4

   Look at how the loan ends

   Discharge fees, break costs on any fixed portion and early repayment charges decide what leaving costs. If there is a reasonable chance you refinance or sell sooner than planned, that cost is part of the price. Ask about portability in the same breath, because carrying an existing loan across to a new property, where the lender allows it, is the alternative to discharging it and applying all over again when you move.

5. 5

   Read the rate arrangement past the first period

   Introductory and fixed rates revert to something. Find out what the loan reverts to and on what basis, so the second phase of the loan is not a surprise.

6. 6

   Ask what is negotiable

   Pricing, fee waivers and some conditions can be asked about, though nothing is guaranteed and the answer depends on the lender, the file and the day.

Get the important answers in writing rather than over the phone. A loan is a document you live with for a long time, and what somebody remembers saying is not part of it.

If two offers are genuinely close, the tie-breaker is usually not price. It is which lender you would rather be dealing with in a few years, when something about the loan needs changing.

The comparison checklist

Run the same questions across every option so you are comparing like with like. Written down, side by side, in the same order each time.

• Principal and interest or interest only, and whether the lender's policy supports what you want
• Fixed, variable or split, and how much certainty you actually need against how much flexibility
• The comparison rate alongside the headline rate on each option, taken as a ranking and nothing more
• Every fee, at the start, along the way and at the end
• Whether setup fees can be added to the loan, and what that adds to the interest you pay
• Repayment flexibility — extra repayments, redraw, offset, and any repayment pause arrangement
• What it costs to exit if you refinance or sell earlier than planned
• Whether the loan is portable — whether you could carry it to a new property when you move, rather than discharging it and applying again
• Whether the lender's credit policy fits your income type, your deposit and the property
• Who you contact after settlement, and how that lender handles a rate review
• Whether the loan still suits your income, your plans and your tolerance for a rate moving

Almost all of that is answerable in writing before you commit to anything. Where a lender or a broker cannot answer a line on it, that is information too.

Where a broker fits into this is narrow and worth stating plainly. A broker compares lender policy and pricing across a panel and puts the file in front of the one that fits, and cannot promise you a rate or an approval, because the credit decision belongs to the lender.