Understanding your home loan

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Buying a home is one of the biggest financial decisions in a lifetime. Determining which loan is best can be overwhelming without understanding which products and features are available on the market. There are a lot of home loans to choose from, but not all will be well suited to your needs. To help you select a home loan that is right for you, we have compiled a list of home loan products and their key features. You should always seek financial advice to suit your own circumstances.

 

The interest rate – fixed vs variable

Probably the most important decision is whether you choose a variable interest rate loan or a fixed rate loan. The decision to take a fixed or variable rate loan is really a decision about managing your risk. Both types have pros and cons and the direction of interest rate movements is unpredictable.

 

Variable interest rate

With a variable interest rate loan, the interest rate charged to you may go up and down. This means that your regular repayment amount will also go up and down as the interest rate changes.

Benefits

  • You are usually permitted to make additional repayments that can save you interest and can help you pay off your home loan sooner
  • Variable rate home loans typically have more flexibility with additional features such as redraw and mortgage offset.

Things to consider

  • Your repayments may increase if interest rates rise
  • Makes budgeting more difficult as you are less certain of how much your repayments will be and how interest rates will move
  • If you have not budgeted for interest rate rises, you may have difficulty keeping up with your repayments.

 

Fixed interest rate

With a fixed interest rate loan, the interest rate charged to you is locked for a set period, typically 1,2 3,4, 5 or 7 years. This means your regular repayment amount will not change during that time.

At the end of the fixed rate term, the loan will usually switch to the standard variable rate offered by the lender or you can choose another fixed rate term.

Benefits

  • Your repayments will not increase if interest rates rise
  • Fixed rate loans provide certainty and make budgeting and planning for your futureeasier as you know exactly how much your repayments will be.

Things to consider

  • You will not benefit from falling interest rates
  • You are fixed into a set term, so you may be unable to sell your property or refinance until that term has expired
  • Unlike exit fees that were abolished in 2011, lenders can still legally charge you a break fee if you payout or refinance a fixed rate loan during the fixed rate period
  • You may not be permitted to make any additional repayments, or they may be capped to a certain amount
  • A redraw facility is usually not available on fixed rate loans
  • When you refinance upon expiry of your fixed rate loan, interest may have significantly increased.

 

Split loan - Part fixed part variable

Another option available is to split your home loan so you have part with a fixed interest rate and part with a variable interest rate. There is typically no restriction on how you split the loan, so you can allocate the proportions that you are most comfortable with e.g. 50/50 or 30/70 etc.

A split loan allows you to take advantage of the benefits of both types of loans – you have the certainty of a fixed rate on part of your loan as well as the flexibility to make extra repayments on the variable rate part of your loan.

 

Principal and interest vs interest only

Generally, home loan repayments will consist of principal and interest components, gradually reducing the amount owing on your loan. With interest-only loans, only the interest is paid each month, leaving the original principal outstanding at the end of the loan term. This 18 PRINCIPAL AND INTEREST VS INTEREST ONLY means that at the end of say 10 years, you will still owe what you started with.

 

Principal and interest

Benefits

  • You will pay less interest over time and you will pay off your loan in full by the end of your loan term.

Things to consider

  • Your repayment amount will be higher as the principal is being repaid as well as interest.

Speak to a qualified expert such as a financial adviser, lender or broker to get the best advice for you

Offset account

A mortgage offset account is a bank account that is linked to your home loan. No interest is paid on the savings in the offset account. Instead the savings in your bank account reduce the balance of your loan on which interest is calculated.

 

Benefits

  • Your home loan interest is charged only on the net balance, reducing the amount of interest you will be charged which mean you can pay your loan off sooner.

Things to consider

  • Higher monthly fees may apply to have this feature
  • No credit interest is earned on the balance in the linked account
  • Additional repayments. Some loans offer the ability to make repayments above the minimum repayment amount, so you can repay the loan faster and reduce the amount of interest you are charged.

Speaking about your personal circumstances can help configure a loan which best suits your needs

 

Redraw facility

This is an optional feature on certain home loans that allows access to any additional repayments made on your home loan. If you redraw funds from your home loan, your outstanding balance will increase. Some lenders have a minimum redraw amount and may also charge a fee per redraw.

 

Additional repayments

Some loans offer the ability to make repayments above the minimum repayment amount, so you can repay the loan faster and reduce the amount of interest you are charged.

 

Loan portability

This feature allows you to transfer your home loan to another property if you move. This may save you money on application fees and mortgage stamp duty down the track.

 

Repayment holiday

This feature offers the ability to take a break from your mortgage repayments. Typically, you can reduce or avoid making your repayments for up to six months, during which time the interest is normally added to your loan. Lenders will typically allow repayment holidays when you are changing jobs or are on maternity leave.

 

Repayment frequency

Refers to the regularity of loan repayments over a period of time which you must make as indicated in your loan agreement. Repayment frequencies are generally weekly, fortnightly or monthly. It is good to have this flexibility to you can align your repayments to your pay cycle.

 

Top up

Some lenders allow you to increase your loan down the track, using the equity in your home, to complete home renovations, make an investment etc. Fees and charges may apply.

 


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