Loan Essentials
October 2024
When you’re new to buying property, choosing a home loan can be overwhelming. There are dozens of different lenders out there all offering different types of mortgages. So, which is right for you?
A mortgage broker can help you select the right home loan, based on your specific financial situation and goals. Here are some of the main options.
Mortgages generally have two components. Principal is the amount of money you borrow. Interest is what you pay in order to borrow that money.
Your loan may be principal and interest, meaning you pay both back with each repayment. Otherwise, you may optb for an interest-only loan, but keep in mind that interest rates for interest-only loans tend to be higher than principal and interest loans.
With a variable rate home loan, your interest rate may fluctuate in line with changes to the cash rate made by the Reserve Bank of Australia (RBA) and other factors. Some borrowers like variable home loans because of the flexibility they offer.
If there’s a cash rate cut by the RBA, for example, lenders may pass on the cut to your interest rate. Likewise, if the cash rate goes up, your interest rate will likely go up too.
If you choose a fixed rate home loan, your interest rate and repayments will be locked in, usually for a term of between one and five years.
This option is attractive to people who want the certainty of knowing exactly how much their repayments will be each week, fortnight or month. If interest rates are likely to rise, fixing your home loan can be beneficial. But if rates come down, you won’t benefit.
Keep in mind you may incur a fee if you decide to switch to a variable rate or refinance your home loan.
A split home loan offers the best of both worlds. It means a portion of your mortgage is variable, and the rest is fixed.
You’ll benefit if rates drop (on the variable portion), but will also be protected if rates increase (on the fixed component).
Other considerations
Basic home loans usually have fewer features than standard home loans, so they’re generally cheaper. Often they come with a variable interest rate.
Packaged loans bundle a home loan with other financial products such as a credit card or transaction account. A discount may be applied to your home loan or fees on some or all of the products are waived for the life of the loan.
Usually, there’s an annual fee for a packaged loan.
An offset is when you have a transaction or savings account linked to your mortgage, and the balance is offset against your loan amount.
Say you have $50,000 in the offset and a loan balance of $500,000. You’d only pay interest on $450,000.
A redraw facility allows you to make extra repayments on your home loan. These additional funds can be accessed – or redrawn – if you need them, but in the meantime, the money in your redraw facility reduces the interest you pay.
If you need to make the occasional big-ticket purchase for renovations or a holiday, a line of credit can be useful. Think of it like a credit card that’s secured by your property. You only pay interest on the funds you use.
Low-doc loans require less financial documentation to prove your income, assets and liabilities than a standard loan. They’re often used by self-employed borrowers or people with other borrowing hurdles.
These types of loans usually come with a higher interest rate than a standard mortgage and may include terms that restrict borrowers.
As your finance broker, we’ll line you up with the right home loan for your specific needs. Get in touch today and let’s chat through your requirements.
