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Have you been chatting to a mortgage broker about obtaining finance to buy or build your first home and you’re feeling a little bit confused about all the different loan terms being discussed? Don’t worry, we’re here to help! We chatted to our friends at Professional Mortgage Managers and they have a thorough list of all the loan terms, what they mean, and how they can benefit you!
Variable loans are loans that are subject to interest rate fluctuations. Whenever your bank increases or decreases interest rates, you will end up either paying more or less for your loan, depending on what the bank has decided to do. The benefit to the customer is that often (but not always) once discounts are applied that lower rates, there is the flexibility to pay down loans quicker, you can have 100% offset accounts and can discharge from your loan at any time without breaking fees.
Fixed loans allow you to lock in a specific interest rate over a set period of time, generally between one and five years. This loan ensures that repayments don’t rise for the fixed rate period. The main risk is that if variable rates fall, you are locked in at a higher rate. The cost of breaking a fixed rate loan contract can be substantial. The benefit to the customer here is the element of repayment certainty in times of rate fluctuation.
Repayments are based on the principle rate, the amount borrowed from the bank, and the interest, the amount to pay for having borrowed the money.
Repayments are made just on the interest, which is the amount you repay for having borrowed the money, and not on the principle borrowed amount. This is generally available for 1 to 5 years for owner occupied loans, and one to ten years for investment loans.
You can take out a mortgage with one portion of the loan variable, and the other fixed. In many ways, this offers the best of both worlds and you have the flexibility to repay more on the variable loan and reduce risk through the fixed loan.
This loan is better suited to the self-employed as low-doc loans require less proof-of-income paperwork, but the interest rate levied is often higher than the standard variable rate.
Some lenders offer mortgages that provide ‘lifetime’ discounted interest rates, fee waivers and linked savings accounts and credit cards. These options are generally offered on high loan amounts.
These loans allow amounts of finance to be drawn down progressively to cover the various stages of a construction project. Repayments (generally only on interest for the first twelve months, then on principal and interest thereafter) are only made on the amount of the loan facility that has been drawn down. However, there are line fees on the undrawn amount, or in most cases on the total facility limit.
This is a way of tapping into the equity in an existing home loan and drawing down funds as required for different purposes, such as renovations. Similar to a credit card, repayments are only made on the amount drawn down. Line-of-credit loans are often interest-only for a significant period, but can revert to principal and interest repayments down the track. Most lenders charge extra for line of credit accounts, either through a facility fee, undrawn funds fees and/or a higher interest rate.
Bridging loans are designed as short-term financing options for borrowers who need funding to buy a new residence before selling their existing home. The interest rates on these loans are higher than the standard variable interest rate.
Now that you’re ready to get finance approval for your first home purchase, having a sound understanding of common loan terms will help you understand the types of loans your broker will suggest that suit your lifestyle and budget. This should also help you in the future in the event that you need to reassess your home loan and make changes where necessary. To find a builder local to you, head to the Hotondo Homes website today. Our builders can assist you with getting in touch with a finance expert to help you start the process of obtaining finance for your new home.
Hotondo Homes is not an authorised financial institution and we recommend home buyers always seek the advice of a registered financial professional before purchasing a home.
An offset account works in the same manner as your everyday banking account with one crucial difference – the balance is offset daily against money you owe on your loan, which reduces the amount of interest you pay.
A reduction in interest means you can pay off your loan quicker. For example, if you have $10,000 in an offset account and you have a $300,000 home loan, you will only pay interest on $290,000. Using this calculator you can see if the interest rate is at 5%, you could save $18,357.69 in interest and cut 1 year and 8 months off the length of a 30 year loan.
Because the money in your account is offset daily against your loan balance, the longer you have money in your account, the more you will save on interest.
There are a few questions that are often asked in relation to offset accounts.
Why not save the money in a high interest account instead?
In almost every case, you will never earn more interest in a savings account than what you are paying in interest on your home loan. Interest earned in a savings account also needs to be declared to the tax office, and tax must be paid on it. Your money will be working much harder for you in an offset account.
Why not put the money straight on the mortgage?
There are benefits to keeping money in your offset account rather than putting it straight on the mortgage. Funds in an offset account can be used like your everyday account. If you have an emergency, or you may be saving for a holiday, it is easy to withdraw funds as necessary. If you put it all on the mortgage, then find you need the money down the track, you may be hit with redraw fees or minimum redraw amounts.
Having a decent amount of savings in your offset account can cut years and thousands of dollars from your home loan. It also offers comfort in the knowledge that you can access these funds at any time, with no issue.
Always beware of extra transaction charges that may surround offset accounts though. It is best you do your research and speak directly to your bank regarding these accounts being used to pay your mortgage faster.
*Hotondo Homes are not financial experts. You should always seek independent legal advice when looking to reduce the amount of your mortgage with an offset account.
It can be that life-changing step towards freedom, but in order to take that step you need a deposit. The more money you save the less you’ll have to borrow, and the less you’ll have to borrow, the less you’ll have to pay in interest.
Sound easy? The truth is saving a home deposit is no walk in the park; it takes discipline, sacrifice, focus and determination. The good news is that we have made it easy for you to do, just follow our 10 saving tips and you could be on your way to save for your first home!