Choosing a home loan can be a daunting and overwhelming experience – especially for first home buyers. With rates and rules around lending and eligibilty changing all the time, it can be hard to get a grasp on what home loan is relevant for you and your situation.
In this blog we’ll run through the types of loans on offer and what they’re used for.
Principle & Interest Home Loans
These types of home loans are comprised of two components; the principle and the interest. The principle is the whole amount you need to borrow to purchase your desired property. The interest is the rate that is charged and added to your principle amount. Your repayments will be comprised of the principle and the interest rate.
Principle and interest home loans are great for first home buyers looking at current interest rates to purchase their first property; which they plan to move into and make their primary place of residence. These home loans can also be used for anyone who is selling their home to buy another property.
Interest Only Home Loans
Interest only home loans, as the name suggests, is where you are only paying off the interest charged on top of your principle amount borrowed. Your repayments will be comprised of the interest charges only. While this sounds appealing, you need to be aware of any introductory periods that revert to principle and interest repayments, as your repayment amount will increase.
Interest only lending is suited to investors taking out a mortgage to buy an investment property, as the interest only repayments provide certain tax benefits. They are also good for managing short-term loan needs. For example, you might need it for a bridging or construction loan.
Variable & Fixed Home Loans
The other key feature of a home loan is whether to go with a variable or a fixed interest rate. There are advantages and disadvantages to both, which we’ll go through next.
Variable rate loans are often lower than fixed rate loans. Use our loan repayment calculator to see what the difference in your repayments would be with two different interest rates.
Variable interest rates can change at the banks discretion. You will be given plenty of notice to adjust your repayments, but if the rate rises, so will your repayments which may affect your budgeting and saving.
Fixed home loans provide the convenience of a fixed rate mortgage for a term of either 1, 3 or 5 years. After your term is up, the rate will usually revert back to the bank’s standard variable rate unless stated otherwise in your loan contract. The benefit is, you know exactly how much your repayments will be each month, and your rate wont change. The main disadvantages are that fixed rate home loans are usually a bit higher than variable rate loans, they can have higher set up fees and break costs, and banks will usually limit how much you can pay off your loan in a year.
Choosing a Home Loan Based On the Features You Are Looking For
Choosing a home loan is all about considering your current situation and making an educated decision as to whether the loan set up will suit you long term. A fixed rate home loan is great for fixed repayments that wont change during the term specified. However if you want to pay off more than the minimum monthly repayment, and make lump sum repayments where you can, it may not be the best choice.
Considering additional features such as a redraw facility or an offset account are great ways to make your savings reduce the interest charged on your home loan. Any bundled features that come with your home loan such as credit cards and insurances are also worth considering.
If you are looking for a Home Loan, but are not sure where to start, get in touch with the friendly team at Horizon Bank today and let us help you on your journey.
The content in this article has been prepared by Horizon Bank for general information only and it is not intended to be professional advice. It does not take into account your objectives, financial situation or needs. You should seek your own legal, accounting, financial or other professional advice where appropriate, and consider the relevant Product Disclosure Statement and Terms and Conditions before deciding whether to acquire any products or services offered by Horizon Bank and/or its affiliated partners. We do not recommend any third party products or services referred to in this article unless otherwise stated and we are not liable in relation to them. Any links to third party websites are for your information and we do not endorse any content on those sites. Horizon Credit Union Ltd ABN 66 087 650 173 AFSL and Australian Credit Licence Number 240573 trading as Horizon Bank.