Securing the right home loan takes time and patience. There are a variety of home loans to choose from and selecting the right one for you is the most critical part of the process. It’s important to educate yourself on the different types of home loans, their overall product features and the interest rates. It’s a competitive market, so shop around and negotiate with your lender. To start you off, here’s our basic overview.
Home loan deposit and Lenders Mortgage Insurance
The first step in deciding what loan is right for you is saving for the deposit. Ideally, you want to have at least 20 per cent of the property’s value saved, but you can have as little as 5 per cent.
If your deposit is less than 20 per cent, you will have to pay Lenders Mortgage Insurance (LMI). It is a condition of home loan borrowing that helps protect lenders against you failing to make a home loan repayment. This can be a one-off payment, or you can roll it into your monthly mortgage repayments.
Principal and interest loans
According to the Australian Securities and Investments Commission (ASIC), most people take out a principal and interest home loan. This means you make regular payments against the amount you have borrowed and pay the interest on the loan at the same time.
Typically, a lender will offer principal and interest loans with a range of features, like a redraw facility or an offset account. However, it’s important to remember that the more features a loan has, the higher the cost will be.
An interest-only loan means you only repay the interest on the loan you have taken out, not the principal amount you have borrowed.
CEO of Belle Property, Peter Hanscomb says, while selecting interest-only means your repayments will be less, it also means you will be paying off your loan for longer.
“Interest-only means the principal amount you have borrowed will not reduce, unless you make additional payments towards it. Make sure you chat to your lender or financial advisor about interest-only before you make the decision.”
Variable, fixed and split rate home loans
Typically, lenders will also offer several different interest rate options:
1. Fixed Rate Home Loan With a fixed rate home loan your repayments will be charged at the same interest rate for one to five years, depending on the agreed terms. “The benefit of this type of loan is that you know exactly what your repayments will be, helping you stay in control of your budget,” said Peter.
2. Variable Rate Home Loan A variable home loan starts with a low-interest rate, and after a fixed term begins to fluctuate with the market as set by the Reserve Bank, meaning your repayments can vary. What makes this type of home loan so appealing though, is that you can package other products (credit or debit cards) with this type of home loan.
3. Home loans with redraw facilities Getting a home loan with redraw facilities provides you with the flexibility to repay more than your minimum repayment amount and if needed, withdraw from it later. The balance you would be able to draw from is the extra payments you have made on top of your required monthly repayments. “There are financial and tax benefits to several different loan arrangements. The best thing to do is speak to your lender or financial advisor for the right guidance,” said Peter.
For more information, visit ASIC moneysmart.gov.au