How to Choose The Right Home Loan For You
Considerations in choosing the right home loan
If it’s your first time buying a home, or you’ve done this many times before, deciding on which home loan is right for you can often be confusing and appear complicated. The complexity of selecting the right home loan comes from the increased amount of competition in the market. There are literally hundreds of lenders that offer a multitude of products so it’s no wonder why some of us feel lost.
Home loan variations
Firstly, when choosing the right home loan for you, you’ll need to understand the types of home loans that exist. Although there are many variations of home loans available, they all share two common terms. Principal and Interest. Principal refers to the amount of money you’ve borrowed and Interest refers to the amount you pay to borrow the money.
A Principal & Interest Home Loan is the most common type of loan. It involves paying off the principal as well as paying interest over a period of years, typically 25 years allowing the loan to be repaid in full over the life of the loan.
An Interest-only loan involves just paying off the interest. The actual principal amount borrowed will not be reduced. If you choose to make extra repayments, you will begin to reduce the principal as well. This option may very well cost you more over the term of the loan as the principal has remained unpaid and therefore, the interest does not reduce and continues to be paid on the maximum amount of the loan.
Loan types typically fall into 3 categories:
- Low interest rate: Many low interest rate loans come with few features and little flexibility. For example, making extra payments against the loan and redrawing accrued sums later. Various restrictions and fees are likely to apply for these kinds of actions.
- Standard loans: These offer more flexibility, for example, you can make extra payments, redraw on the loan and can use fixed or variable interest rates for the loan in whole or in part. These will usually come with an offset account which allow additional payments to be offset against the total interest paid.
- Home loan packages: These will include the flexibility of a standard loan plus the benefit of an interest rate discount. Annual package fees, however, may be much higher than other loans.
Interest Rate options
Another key area for consideration is the type of interest rate. Lenders generally offer several options for interest rates. Finding the option that best suits your current situation is key to choosing the right home loan for you.
Common interest rate options include:
- Fixed Rate – Depending on the period chosen (generally 2-5 years), your loan’s interest rate will remain unchanged for the life of the period. This offers consistency in knowing exactly how much you need to pay each month.
- Variable Rate – This rate is affected by the official cash rate as well as other factors, and may increase or decrease multiple times throughout the loan period. This means you can capitalise on low interest rates but will also pay more if the interest rate increases. It’s important to note too that changes in the official cash rate doesn’t guarantee your loan rate will change by the same amount.
- Split Loan – A Split Loan is a combination of variable and fixed rate. One part of your loan will have a varying interest rate and the other part will be fixed allowing you to make some gains on low interest rates but limiting your exposure to fluctuations by keeping some of the loan on a fixed rate.
A note on fees
Just as there are a variety of options on loans and interest rates, there is also a large number of fees that come with your loan that lenders may vary depending on the type of loan you secure.
Fees range from establishing your loan through to breaking your loan, account fees or changing features and options and can make a large difference to the amount you pay. These must be considered also when choosing a loan and comparing various loans are a necessary part of the process.
Can I pay my loan off quicker?
Making repayments to save yourself on interest and having your loan paid off quicker is a great idea. However, if you already have a loan in place, you’ll need to check the limitations on repayments. Depending on the type of loan you have, you may be limited to the amount of repayments you can make each year.
Why choosing the right loan is so important
Choosing the right home loan can be a daunting process simply due to the number of products, variations and complexities of applying and not least of all, your personal situation. But ensuring you have the right loan is critical to managing your ability to maintain your loan repayments comfortably and reduce the risk of failing on these commitments. Importantly too, the span of a home loan is a long time and your life situation will change throughout it.
Choosing the right loan structure for your whole situation also considers how you can flexibly manage these changes and use your loan to help you prosper.
At Mintwell Capital, we always recommend you speak with a professional Mortgage Broker, as they will be able to provide you the most suitable option for your current situation.