Choosing a home loan can be a daunting and overwhelming experience – especially for first home buyers. With rates and rules around lending and eligibility changing all the time, it can be hard to get a grasp on which 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’s charged and added to your principle amount. Your repayments will be comprised of the principle and the interest. Principle and interest home loans are normally for buyers and first home buyers of their primary place of residence.
Interest Only Home Loans
Interest only home loans, as the name suggests, is where you’re only paying off the interest charged on top of the 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’re 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.
Fixed home loans provide the convenience of a fixed rate mortgage for a term of either 1, 2, 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 of a fixed home loan is you know exactly how much your repayments will be each month and your rate won’t change during the fixed period. The main disadvantages are that fixed home loan rates 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.
Variable rate loans are often lower than fixed rate loans. Variable interest rates can change at the bank’s discretion. If the rate rises, so will your repayments which may affect your budgeting and saving. Conversely, if the rate decreases, your repayments will reduce. This gives you an opportunity to pay the loan off quicker if you keep your repayments the same.
Use our loan repayment calculator to see the difference in repayments would be with the two different types of loans’ interest rates.
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 won’t change during the specified term. 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 and to pay it off quicker.
You can compare our home loans and their comparison rates by viewing our home loan comparison table. We also have a range of mortgage calculators you can use to get an idea of what your repayments may be.
Frequently Asked Questions
How much can I borrow?
The total amount you can borrow will be dependent on a number of factors such as income, expenses and existing debts. Use our borrowing power calculator to get started.
What will my repayments be?
Your repayment amount will depend on how much you borrow from us, your interest rate, and how often you make repayments. Use our repayment calculator to get started.
How do you refinance a home loan?
If you have your home loan with another lender and would like to refinance to Horizon Bank, check out our article on refinancing or get in touch with any questions.
If you’re looking for a Home Loan, but 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.