What Is The Right Home Loan Type For You?

Young couple getting help from a real estate agent

When looking for the perfect home loan, you need to have a clear understanding of 2 basic principles: The loan principal – which is the amount you borrow, and the loan interest – the amount you pay to borrow the money.  Most lenders will align their loan types around these 2 principles. Here are some of the most common types of loans you will encounter when dealing with home loans.

Fixed Loans

This loan type has the interest and repayments fixed for a certain period, usually between 3 – 5 years. This allows you to draw up a consistent budget without any changes to your repayments. Although fixed loans provide you that certainty, interest repayments will never change even if the market rates drop. You cannot redraw and make extra repayments on a Fixed Loan.

Variable Loans

Currently the most popular loan type in Australia, this loan type allows for varying interest rate payments depending on the lender. Changes to the interest rate will affect your loan – If the Interest rates drop, so will your repayments. If the Interest rates go up, so will your repayments. The good thing about Variable Loans is that you can create a budget plan where you can make extra repayments, shortening the term of the loan.

Split Loans

Split Loans are blended loan types that provide you the flexibility by combining Fixed and Variable options in one loan. This allows you to shorten the loan term by making extra repayments, but you still run into the risk of increasing repayments when the interest rates go up, affecting the Variable portion of your loan.

Lo – Doc Loans

Lo – Doc allows home buyers to secure a home loan even if they don’t have the necessary financial documents. Lo – Docs can either be Fixed or Variable. This helps people secure a loan, but also charges higher than other loan types. Repayments usually decrease after a few years if paid on time.

Line of Credit

Line of Credit allows you to draw from a fixed amount for home, shares, or any other asset types. This loan type provides you the extra funds, but with your home as security for the loan. You only pay interest on the funds you use, and can be accessed like a normal savings account.

Equity Release

Also called Reverse Mortgage, this allows people over 60 to gain access to equity on the property. Although no repayments are made, monthly interest accrued has to be paid when the property is sold.

To find out what loan type is the best for you, consult a certified financial planner. Home loans should help ease the burden and should not cause you financial stress when securing the home of your dreams.

Mortgages – Fixed Or Variable?

As property investment consultants and builders of wealth, one of the most common questions we get asked is what sort of mortgage should I go for? Fixed or variable? In fact it is the number one question mortgage brokers around the world get asked by every single one of their clients.

Whilst the crew at Fountain Property Group don’t have a crystal ball and cannot predict the future we can offer a fountain of information when it comes to historical data and information on these two forms of mortgage. All loans, including personal loans, credit cards and mortgages, have their interest rate set according to the prime interest rate that is set by our country’s governing body.

In Australia, this governing body is the Reserve Bank of Australia (RBA). The RBA will assess a complicated variety of indicators and trends to establish this rate. These factors may include, but are not limited to:

  • the employment rate
  • consumer spending
  • commodity pricing
  • labour costs and availability
  • inflation
  • and the Australian Dollar value
  • Variable Loans

The variable loan will be based on the rate that is set down by the RBA. Lending institutions will then add their operating costs and of course profit to the deal. This market is fairly competitive with many options to choose from. Whatever the market is doing, the variable interest rate will follow. If rates increase – so will you repayments. If the rates decrease, so will your payments.

Fixed Loans

A fixed rate loan means that you will know exactly what you are paying from the moment the loan is taken. Whatever the market is doing, the fixed interest rate will remain static for the term of that agreement. This means that whether rates increase or decrease your payments will remain the same. This is a great way for people who need to maintain a budget.

Which is Better?

Back to that magic question. Which is better? Both styles of loan have their advantages and disadvantages. We offer the classic answer, being that it depends on your own personal situation.
Things that you can assess to help you make this decision will include:

  • How much can you afford to pay?
  • If the interest rates were to rise could you afford it?
  • How long do you intend to hold this mortgage for?
  • Does the fixed rate have any controlling factors such as no extra payments allowed or penalties for paying out early?
  • Which way is the market trending?

For more information, have a chat with one of our consultants.

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