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Here at Creditworld, we aim to make the process of finding, comparing and applying for home loans as simple as possible. Want to know what to look for in a home loan? Check out the guide below. Then it’s simply a matter of telling us what you want from your home loan, and we’ll match you with a range of options to suit your needs.
What is a Home Loan?
Just as a car loan allows car buyers to cover the cost of buying a car, a home loan allows home buyers to cover the cost of buying a home. When you apply for a home loan, you create a contract with the lender, which stipulates you will repay the total loan amount, along with interest – at a rate set by the lender – and any fees that may apply.
With home loans typically extending to hundreds of thousands of dollars, lenders reduce their risk on those loans by securing them against the purchased property. That means, with their home as collateral, borrowers who are unable to repay their loan risk being forced to sell their home to repay the debt. With that being said, by securing the loan, lenders can offer much lower rates than may be seen on other types of unsecured credit, such as personal loans or credit cards.
While the idea of a home loan is simple enough, home loans as a lending product come with more than their fair share of small print. From fees and features, to the formalities behind deposit amounts, interest rates and all the rest, home loans can get pretty darn complicated.
Variable Rate Home Loans
A variable rate home loan has a variable rate of interest, which means it can change over time. While this rate may reflect factors such as the official cash rate and the market in general, it is ultimately determined by the lender, and can go up or down at any time.
Variable rate home loans tend to be more flexible. You can usually pay more than your set repayment amount if you choose, with no fees to worry about.
Paying more could allow you to repay your loan early – while paying less in interest overall – or it could let you lower your interest while setting up a buffer in an offset account.
Variable rate home loans can also allow you to take advantage of lower rates when they fall, meaning your required repayment will drop – or you continue to pay more to repay your loan faster.
The main disadvantage of a variable rate home loan is that when rates increase, your repayment will also likely rise. This could make meeting your repayments difficult if you are on a tight budget.
Fixed Rate Home Loans
A fixed rate home loan has a fixed rate of interest over a set period of time. Fixed rate home loans are typically offered over one, two, three, four or five years, with the rate remaining unchanged over that entire period.
When you apply for a fixed rate home loan, you can take advantage of a low rate and ‘fix’ it for a certain period of time. This could save you money if rates increase over that fixed period.
To encourage borrowers to sign up, rates applied to fixed rate home loans are often lower than those offered on variable rate home loans offered on the market at the same time.
With a fixed rate, you always know how much your repayment will be. This can make it easier to budget.
If rates fall as you pay off your fixed rate home loan, you won’t be able to take advantage of those lower rates.
Fixed rate home loans are generally not as flexible as variable rate home loans. You may not be able to make additional payments, and if you choose to switch loans or sell before the end of the loan period, you may face a hefty break fee.
Split Home Loans
As the name suggests, a split loan is a combination of a variable rate home loan and a fixed rate home loan. With this type of loan, you split the loan, so that part of the loan attracts a variable rate and part attracts a fixed rate.
With a split rate loan, you can enjoy the ‘best of both worlds’. So, if you’re not sure about fixing all of your loan, you can fix part of it. If rates go up, the fixed part of your loan remains on a low rate. If rates go down, the variable part of your loan will benefit from the lower rates on offer.
You may also be able to enjoy the flexibility offered on a variable rate home loan, with the option to make larger repayments when your budget allows.
As with a fixed rate loan, there may be costs involved in ‘breaking’ the loan if you switch loans or move house before the end of the fixed period.
Interest-only Home Loans
With an interest-only home loan, you only pay off the interest on the loan, rather than the interest and principal as you would on a standard loan. Typically, interest-only loans are interest-only for a short period of time – usually between one and five years – after which time, the loan will revert to a principal and interest loan.
Example: Eve borrows $500,000 on a 30 year home loan, opting to start with a five-year interest-only period to lower her repayment amount. During that five year period, Eve’s monthly repayment is $2,083 rather than $2,684, giving her an extra $601 in her pocket each month.
Once that five years is up, however, Eve’s monthly repayment increases to $2,923. Not only is she now paying $239 more per month than she would on a standard principal and interest loan, she also pays an extra $35,606 in interest over the life of the loan.
An interest-only loan can work well for investors looking to claim the interest they pay as a tax deduction, or for buyers who only plan on holding onto a property for a few years before selling it.
While repayments on an interest-only loan are smaller than a principal and interest loan during the interest-only period, they would likely be higher after the interest-only period ends.
The interest paid out over the length of the loan may also be higher, as you are not paying down any of the principal during the interest-only period.
First Home Buyer Home Loans
A first home buyer home loan is a loan for those looking to buy their first home. First home buyer loans can fit within any of the categories mentioned above, allowing first home buyers to choose between a fixed rate, variable rate, split rate or interest-only, or to build their own home with a construction home loan (see below).
Refinancing Home Loans
Borrowers who have an existing home loan may choose to refinance to another home loan. Switching home loans in this way could allow them to take advantage of a lower rate, to then save in interest over time. Or, it could allow them to extend the period of their loan to benefit from lower repayments. Refinancing can also allow borrowers to increase their loan to cover the cost of renovations, or to consolidate their debts. Moving house provides yet another reason for refinancing.
Owner Occupier Home Loans
With an owner occupier home loan, the borrower lives in the home being financed. Owner occupied home loans may offer lower rates than their counterpart, investment home loans, and will generally come with different features, such as an offset account.
Investment Home Loans
Unlike owner occupied home loans, investment home loans are designed to allow borrowers to buy property as an investment, rather than a full-time residence. This type of loan lets borrowers buy property to rent out as a form of income, without needing to cover the full cost upfront. Lenders typically require a larger down payment on this type of loan, compared to owner occupied loans.
Construction Home Loans
Construction home loans are designed to help borrowers cover the cost of building a home. After the loan has been approved and construction of the property is underway, the lender makes progress payments as construction continues, covering the various costs associated with building over the build period.
This type of loan is typically interest-only over the first 12 months, after which point, it reverts to a standard principal and interest loan. Interest is only charged on the amount paid out, which increases over time as progress payments are made. The total loan amount is partly based on how much the property will be worth when completed.
Top questions people ask us
Just like credit cards, home loans can offer incentives as a means of encouraging borrowers to apply. Cashback offers are pretty common, but there are other offers that can waive fees and lower interest rates over an introductory period. Think carefully about what happens after the intro period before you sign up, and consider whether the incentive is worth it in the long run.
Before you start house hunting, it can be a good idea to get pre-approval on a home loan. This should give you a guide regarding what you can afford to put down on a property, allowing you to shop within your price range and avoid disappointment.
First things first, you will need to save a deposit. From there, work out how much you can afford to borrow, while covering any additional costs associated with buying a home. From there, you will need to compare home loans. This is where Credit World comes into its own.
After doing all that hard work, you can pass the torch to our team, who will work on finding a range of compatible home loans for you to choose from. Simply tell us what you need, we’ll sort out the details, and take it from there. Got questions? We’re here to help.