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.
Principal and interest
Mortgages typically consist of two parts.
Principal - The sum of money you take out as a loan
Interest - The cost you incur to borrow the money
Your loan can either be principal and interest, where you repay both each time, or interest-only, which typically comes with higher interest rates.
Variable rate home loans
A variable rate home loan means your interest rate can change based on adjustments to the cash rate by the Reserve Bank of Australia (RBA) and other factors. Some borrowers prefer variable home loans due to the flexibility they provide.
For instance, when the RBA reduces the cash rate, lenders might lower your interest rate accordingly. Conversely, if the cash rate increases, it is probable that your interest rate will rise as well.
Fixed rate home loans
Choosing a fixed rate home loan means your interest rate and repayments stay the same, typically for one to five years. This appeals to those who want predictable payments. While fixing can be advantageous if rates rise, you won't gain if they fall. Be aware that switching to a variable rate or refinancing may incur fees.
Split home loans
A split home loan combines the advantages of both variable and fixed rates. Part of your mortgage will have a variable rate, while the other part will be at a fixed rate. This way, you'll gain from rate decreases on the variable segment, but also enjoy protection against rate hikes on the fixed portion.
Other considerations
Basic versus standard
Basic home loans typically have fewer features than standard ones, which makes them more affordable and often come with a variable interest rate.
Packaged loan
Packaged loans combine a home loan with products like a credit card or transaction account, potentially offering home loan discounts or waived fees on these products for the loan's duration. Typically, an annual fee applies to these loans.
Offset
An offset involves linking a transaction or savings account to your mortgage, so the balance reduces your loan amount.
For instance:
Offset Amount = $50,000
Loan Balance = $500,000
Interest Paid On = $450,000
Redraw facility
A redraw facility lets you make extra home loan repayments and access those funds later if needed. Meanwhile, it reduces the interest you incur.
Line of credit
A line of credit can be beneficial for occasional significant expenses such as renovations or vacations. It's similar to a credit card but secured by your property, and you only incur interest charges on the amount you actually use.
Low-doc loans
Low-doc loans need less financial paperwork to verify your income, assets, and debts compared to standard loans. They're typically aimed at self-employed individuals or those facing borrowing challenges. These loans often have higher interest rates and may come with restrictive terms.
