How To Choose The Right Home Loan
Before you can begin your first house hunt, it’s crucial to get your finances in order. This means visiting a number of different brokers and determining the best home loan structure for you. You’ll want to get a number of quotes and compare home loans. Loans vary in a number of ways. But one thing is certain; unless you’re relying on the bank of mum and dad, or you’ve inherited some serious cash, almost everyone buying their first home needs to take out a loan of some form. Here is the breakdown of the different loans on offer, and what you need to know when choosing a home loan to get into your first home sooner.
1. Principal and interest loans
Principal and interest loans are by far the most popular. This is where you make regular payments against the principal, or the amount borrowed, and also pay interest. While you end up paying a lot more than the cost of the home, you have the ability to move in sooner. The loan is paid off over an agreed upon term, which may be anywhere up to 30 years.
There are then a number of different features that you can get with your principal and interest loan, including redraw facilities or offset accounts. These additional features will bump up the price.
2. Interest-only loans
Interest-only loans involve a period of time where the borrower only has to pay off the interest on the loan, rather than the principal and the interest. Essentially, they are not paying off any of their original amount borrowed. This might seem counter intuitive, but most borrowers who opt for this choice will set up an offset account where they can choose to make extra repayments.
The problem with this strategy is that once the initial interest only period ends, after five years or so, then the borrowers have five years less to pay off the entirety of their loan, as well as continue paying interest. The repayments therefore end up being higher than if they had originally taken out a principal and interest loan.
To compare home loans across principal and interest or interest only, visit your local lender.
3. Variable interest rate loans
Lenders offer three key options when it comes to how they will accrue interest on your loan. A variable rate means that your interest rate will rise and fall as the market does. Securing a variable rate when interest rates are at a low point would be a strange choice, because they are likely to only go up.
4. Fixed interest rate loans
Fixed rate interest means that your interest rate is fixed, at a predetermined amount. Despite the market, your loan interest won’t budge. It is worth noting however, that these fixed rates are often only valid for part of the loan term, such as five years. After that, it may revert to a variable loan.
The problem with some fixed rate loans is that there are limitations on how many repayments you can make. Or perhaps there may be a higher fee if you wanted to relocate. After all, if you can pay off your loan too quickly, then the lender won’t be making interest off of you.
5. Split interest rate loans
A split loan, where part of the loan is variable and part of it is fixed, allows the best of both worlds. You can often make extra repayments on the variable portion of the loan while still having the security of a fixed rate, just in case. You can compare home loans in all their pros and cons with your local broker.
6. Added features
As mentioned earlier, additional features tacked onto your loan can up some of the costs involved. But, it can be worth knowing about these features to determine if they could be the right choice for your loan.
An offset account is a savings account linked to your home loan. If there’s $20,000 in your savings account, then you only pay interest on your loan minus that $20,000. The more money is in that savings account, the more it will pay off. Alternatively, if you’re tempted to dip into your savings every now and then, this will not be a good option.
A redraw facility means that you can pay extra money into your loan, and then redraw that later if needed. This feature usually involves strict conditions or fees to redraw. Be sure to quiz your lender on the terms and conditions.
Line of credit loans are when you determine a credit limit, for example of $500,000. You can then spend up to that limit. Most often, wages go in in and living expenses come out of this account. As you repay the loan, the credit limit amount remains the same. This means that you can continually keep borrowing and paying off the loan, until the specified end date. These loans are not to be misused; they should be approached with caution and strict financial discipline.
Remember, going to a specialist broker to help you determine what you need to know when choosing a home loan. Amid application fees, valuation fees, monthly fees and trying to compare home loans, it takes a professional to be able to match you to a life-long financial fit.
