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Choosing the right loan

24/12/2019

Buying a new home? Make sure you get the right loan.

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Whether you’re upsizing, downsizing or buying an investment property, there's a good chance you’re going to need to borrow some money. But with so many options available, where do you begin? We’re here to help. Take note of these tips before you start your search for a home loan and get prepared for what’s to come.

5 questions to ask when comparing home loans.

Your situation

The first thing to do when you start looking for a home loan is to assess your own situation. Once you know the price of the house you have your eye on, figure out a realistic amount you can afford to pay every month using a home loan calculator. You’ll also need to consider the term of the loan - in other words how long you’ll be paying it off and if you would like flexibility in your repayments. Armed with this information, you can start assessing your options.

Interest rate

The interest rate on your home loan is normally one of the most important features to think about. Most lenders will give you the option of a fixed interest rate or variable interest rateor a combination of both in a split loan. This gives you the chance to tailor your payment plan to your own preference and circumstances. 

A fixed interest rate means you have a locked in rate, plus pay a set monthly repayment from the start of your loan to the end of the fixed term, after which your loan will usually revert to a variable rate loan. A fixed rate loan has several benefits, including peace of mind that the interest rate won’t rise, and more financial certainty if you’re trying to budget.

A variable interest rate on your loan means the interest rate can go up or down, meaning your repayments can change. This type of loan is generally more flexible and has additional features compared to a fixed rate loan. But with this loan type, if interest rates rise, you have to be prepared to pay the higher rate.

Another option is to split your loan, meaning you assign a certain portion of your loan to a fixed rate, and the other to a variable rate. That means you can enjoy the advantages of having both a fixed and variable rate.

Principal and interest or interest only loans

When you take out a home loan, there are 2 repayment types available depending on your loan type:

  • Principal and interest: Principal and interest payments are where your repayments are calculated to pay off the outstanding loan amount (principal) itself as well as the interest accrued on the home loan. The benefit of choosing a principal and interest repayment is that each month you’ll be paying off part of the principal, meaning you will be building equity in the property and getting closer to paying off your loan.
  • Interest only: With an interest only loan, you will only pay the interest on the loan and the principal amount you borrowed will not reduce, meaning you are not getting any closer to owning the property outright. Interest Only repayments are generally restricted to a set period (usually a maximum of 5 years) after which the loan will revert to principal and interest repayments.The benefit of choosing an interest-only loan is that the repayments are usually much smaller making it easier initially to maintain cash flow. Interest Only loans will cost more over the long term due to you not paying down the principal over the interest only period.

Buying Before Selling

If you’re looking to move from a property you own to a new one, it can be difficult to predict when the buying and selling will happen. In the event you want to buy a property before selling, a bridging loan could be a good option. These are normally available for several weeks to bridge the gap between the purchase of your new property and the sale of your original property.

Extra fees

Whilst loan repayments are your main costs, don’t forget to look into the fees required for each home loan you consider. Often fees will add up to a few hundred dollars, but make sure you ask your lender to outline each of them so you aren’t caught out with any surprises. The most common fees to look out for are home loan establishment fees, home loan ongoing fees, exit fees, early discharge fees, and lender’s mortgage insurance.

Deposit

Your deposit is one of the biggest expenses you’ll need to factor in when buying a home. But while it can be tempting to spend as little as possible on your deposit and get moved into your new home as soon as possible, generally the more you have saved for a deposit the better home loan rate you’ll qualify for. Most lenders look at your loan to valuation ratio (LVR) to determine the risk associated with lending you money and if your deposit represents less than 20% of the value of the property, you will likely need to pay Lenders Mortgage Insurance.

Ready to start your home loan search? Get in touch with one of our lending experts today to explore your options.

This article is intended to provide general information of an educational nature only. This information has been prepared without taking into account your objectives, financial situation or needs. Therefore, before acting on this information, you should consider its appropriateness having regard to these matters and the product terms and conditions. Information in this article is current as at the date of publication. Terms, conditions, fees, charges and credit criteria apply. We do not recommend any third party products or services and we are not liable in relation to them. Any links to third party websites are for your information only and we do not endorse their content.

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