IMPORTANT THINGS TO KNOW ABOUT HOME LOANS
Two things you need to consider when buying a home are the mortgage interest rate and the home loan type you’d prefer.
There are different types of home loans that suit different goals and situations. The Home Loan Shop can discuss with you the advantages and disadvantages of each type of home loan and how they may or may not benefit your current financial situation.
Principal and Interest
This is the most common home loan type that home buyers choose. You basically repay both the principal and the interest for a term up to thirty years. Payments may be made weekly, fortnightly or monthly.
Most of the time, those who choose this type of loan try to pay as much as they can in the early years of the loan to save themselves thousands on interest.
Line of credit/Revolving credit facility
This home loan option is best described as an overdraft facility on the back end of your everyday transactional account. We recommend that all of your income is credited to this facility to maximise the saving on interest. For a client whose outgoings are a lot less than their income and have a strong ability to budget, this product is excellent. Another option is to use a credit card that is interest free for up to 55 days to pay your household expenses from; the credit card will then be repaid at the end of each month with a direct credit from your line of credit. This product is also used well to save interest in a ‘loan to build’ progressive drawdown scenario. We recommend that you speak to your mortgage adviser prior to committing to this type of mortgage because it requires a lot of discipline and does not suit everyone.
As the name suggests, interest only home loans allows you to only pay the interest of the home loan. However, this is not recommended to owner-occupied homes as the principal amount will still be there by the end of the term. Property investors like to use this option to improve their cash flow of their rental portfolio.
Fixed Interest Rates
This type of home loan allows you to set a fixed rate in for 6 months to 5 years. The advantage of this home loan type is that the interest rate you select will be set for the period of time agreed on. It is an excellent option when looking for stability.
If interest rates were to decrease or increase during your fixed rate term your rate would remain the same until the maturity of the term agreed on.
It is very important to get these terms correct as there are potential break fees if you decided to cancel your loan prior to the fixed term maturity date. You have the option to select more than one fixed term to offset risk or plan for any future changes to your personal position. We highly recommend that you speak to your adviser prior to committing to a lock rate agreement.
Variable/Floating Interest Rates
Unlike fixed interest rate homes loans, this home loan type will have an interest rate increase or decrease as the economy changes. If the rate increases or decreases so will the interest portion of your home loan repayment. The OCR has a strong impact on a variable home loan product. The banks tend to offer a 30 day notice of a variable interest rate change.
A combo loan can offer flexibility to your mortgage structure. A combo loan can consist of some fixed and some floating, more than one fixed rate or after discussions could contain more than one fixed option and the use of a revolving credit facility.
An off-set loan is where you have one or multiple transactional accounts in credit that off-set a variable mortgage account. The banks do not offer this product on a fixed rate at this stage. This option is similar to a revolving credit facility however you can nominate more than one account to off-set if it works for your personal situation. There are also options for direct family to offer a large investment of cash to off-set another family member’s mortgage.
Not sure what type of home loan is best for you? Contact The Home Loan Shop for advice from our experts.