Obtaining a mortgage for a new home can be an incredibly exciting experience, especially with all of the incredible possibilities having a new home has to offer! Once you have decided you are on the market for a new property, it is important to make sure you know the all about the types of home loans and their securing a home loan. Here is our guide, especially for our Australian readers looking at getting a home loan:
Know the Types of Home Loans
Basic Home Loans
Many times, basic home loans offer interest rates that are quite a bit lower than loans packed with more features, which often means that the minimum monthly repayments will also be lower. However, you should also keep in mind that these loans may not offer the option of crediting the borrower’s salary into their loan account or the option to make additional repayments, as well as withdrawing such additional payments later. These loans are helpful for borrowers who know that they won’t need more flexibility in the feature with their home loan.
Introductory Home Loans
Introductory home loans, or ‘honeymoon rates’ as they are sometimes called, often offer the lowest interest rates around. However, after the ‘honeymoon’ period, which is usually between one to three years, the interest rates of these loans increases, thus increasing the amount of your repayments.
Lines of Credit
A line of credit consists of a prearranged credit limit that the borrower can draw down money from. They are typically ongoing and do not have a termination day set. However, sometimes it is required that the borrower does make a regular repayment of interest, while other times no repayment is required unless the credit limit has been exceeded. For home loans, lines of credit are usually determined by a particular percentage of the home’s value. It is also important to keep in mind that some of these work in this way for a period of time and turn into a principal and interest loan later.
Fixed Rate Home Loans
Fixed rate home loans are often offered for a period of one to five years in Australia, where your interest rate will not change during that period of time.
Variable Rate Home Loans
Variable rate home loans typically have rates that move up and down, determined by the cash rate that is set by the Reserve Bank of Australia (RBA). They typically change by an identical or similar amount to the official cash rate when the RBA changes it. Borrowers with variable interest rate loans will fare better than those with fixed rate loans when interest rates fall, but they will often also fare less well when interest rates rise.
Consider the Features
Some loans offer the ability to make additional repayments, which can save the borrower a lot of money in interest. In fact, it may even save the borrower tens of thousands of dollars over the term of the home loan.
Portability means you can use your home loan even after you sell your home in order to purchase another one. This is typically included in a home loan as a portability fee, which may especially be useful for someone who tends to move into new homes frequently.
100% Offset Loans and Partial Offset Loans
Some home loans offer a 100% offset account that runs along with your home loan account, working in a similar fashion to a transaction or savings account. Partial offset loans, on the other hand, include a partial offset account, which means the interest rate will only be offset on that account.
These combine all of your cheque and savings account into a single loan account, allowing you to have all of your earnings placed directly into your home loan account. This can save you money on your home loan, since money left in the account after repayments are taken out will help to reduce the amount of money in which interest is calculated, thus reducing interest payments.
Hey Marissa, great post and, just in time too! I’m going into the house market pretty soon. I can’t wait to see what I can find. As with most people, I won’t be able to pay the thing off cash so, I’m going to need a mortgage. So, this is really, really useful to me right now! Thanks again!
P.S. I’d love to see you in the conversation over at CNA…hope to see ya soon!
Very nice overview, Marissa. I know there are plenty of different types of home loans, but I don’t think I’ll venture away from the fixed rate mortgages. I want to know how much I’ll have to pay every month and not have it possibly change. That being said, some of the other loan types may work better for other people.