Choosing a Home Loan
There are a variety of home loans available and each offers different features. Lenders will provide information on the types of loans they offer. When selecting a loan you should look for a competitive rate of interest, sufficient time to repay the loan, favourable conditions and options that suit your needs. Repayment options and switching costs should be taken into account.
There are two basic home loan types: variable rate loans and fixed rate loans. Each has advantages and disadvantages.
Variable rate loan
Variable rate loans are mortgages where the interest rates generally move with changing economic conditions. When interest rates fall, repayments fall but when interest rates rise, so do the repayments.
The standard variable loan is often more flexible than others and comes with more features and the option to make additional payments without penalty.
Basic variable loan
Lenders now offer basic variable loans with lower interest rates but with fewer features than a standard variable loan. The interest rates and repayments vary over the term of the loan however, it may offer the features or flexibility of the standard variable rate loan.
Also known as a honeymoon loan, an introductory loan offers a low interest rate to attract borrowers. The rate generally lasts for 6 months to a year before it rises and reverts to the standard variable rate.
Fixed interest rate loan
Fixed rate loans protect you against interest rate changes for an agreed time, so you have peace of mind knowing your repayments won’t change.
This type of loan is suitable for people who like to know exactly how much their interest rate and repayments will be for one, two or even up to five years.
You can still make extra repayments over and above your normal monthly repayments however, you won’t benefit if rates go down during the fixed term. The amount of the extra payment allowed will depend on your lender.
Split loan: part fixed part variable
Some clients choose to take a combination of a fixed rate loan and a variable rate loan and get the ‘best of both worlds’, so to speak.
Line of credit
A line of credit allows you to borrow against the value of your existing home using a revolving credit account to access funds when they are needed. Lenders offer home lines of credit in several ways with either fixed or variable interest rates.
A bridging loan can be used to cover the financial gap between the purchase price of a new property and the proceeds of the sale of an existing property. Bridging finance is generally more expensive and is limited to a six to twelve month term.
Redraw your additional payments
Additional payments made to your home loan are available to be redrawn on both fixed and variable rate home loans. A minimum redraw amount may apply. Check your loan conditions for limitations on redraw facilities.
Flexible repayment options to suit you
Repayments are required to be made to your loan on a monthly basis; however more frequent repayments are permitted. Pay your loan weekly or fortnightly and by doing so you will help reduce the term of your loan.
Tax paid on property purchase
State Tax also known as Stamp Duty is a general tax which is imposed on the purchase of real estate. Stamp duty is paid by the purchaser so this should be factored into your budget as to determine what you can afford.
Home buyers who borrow more than 80% of the purchase price generally have to pay mortgage insurance. This protects the lender if you default on your repayments. The cost of mortgage insurance is generally 2 to 4 per cent of the purchase price.