Purchasing a home for the first time is one of the most significant financial decisions you will ever make. Home loans are offered at alternate lending rates, so it is important to shop around for the right deal and options for your lifestyle and circumstances. There are three different type of home loans: fixed rate, variable or split loans.
Interest rates and repayments are locked in place for a designated time period (typically between one to five years). The fixed rate is generally higher than other mortgage rates, but the certainty of the loan enables you to budget easier. This type of loan reverts to a variable rate at the end of the allocated time period. Opting for a fixed rate mortgage might mean making extra repayments isn’t possible. This loan is usually accompanied with a fee for a break free.
Australia’s most popular type of loan, the rates are generally lower than fixed home loan rates. The interest rate together with your repayments will vary (both rising and falling) throughout the duration of the loan. This loan usually allows you to make extra repayments as you go. The negative is that your lender may increase the loan rate at any time.
This loan enables you to hedge your bets both ways. You fix a portion of the loan to a set rate and allow the remaining portion of the loan to fluctuate with the market. While less flexible than a fully variable rate loan, your lender with usually allow you to make extra repayments on the variable rate portion. This type of loan will benefit if interest rates go down on the variable portion of the loan. You may still be charged a break fee for the fixed rate portion.
Features offered by lenders are also key when factoring in the type of payments that will work in conjunction with your lifestyle and needs. Below are a list of mortgage features to consider:
Interest only repayments
This option allows you to pay off the interest portion of the loan only for a set period, typically one to five years. It won’t save you money in the long run because you won’t be reducing your principal loan. You will still be required to pay off the original amount you borrowed after the interest only repayment period comes to an end.
Weekly or fortnightly repayments
Some lenders allow you to make your loan repayments fortnightly or weekly as opposed to the typical monthly repayments, saving over time because interest does not have the chance to accrue over the month.
Having a home loan with this feature allows you to make larger sums of repayments intermittently or regularly to pay off your mortgage faster, saving in interest payments in the long term.
It is important to find a home loan with all the features and option that suit your individual lifestyle and needs.