Home Loans 101: Understanding loan options

Loan options can be confusing to those new to mortgages, or sometimes even those that have had home loans for years.

Here’s a 101 to get you up to speed on loan types:

1) Basic home loans

Basic home loans or ‘no frills’ loans offer borrowers a loan with a low interest rate. This interest and principal repayment loan can be popular with first home buyers. A basic home loan’s interest rate can be half to one per cent below the standard variable rate, which is sometimes combined with minimal ongoing fees. Potential drawbacks can include limited features, less flexibility, and additional charges if you decide to switch loans or pay the loan off sooner.

2) Fixed-rate home loans

Worried about rising interest rates? A fixed-rate home loan will allow you to fix your interest rate for a specific period, usually from one to five years. It can be a sound option when interest rates are on the rise, or in times of economic uncertainty. Should interest rates plummet, however, you’ll still have to pay off your mortgage at the fixed-rate until the end of the agreed fixed-rate period. Additionally, keep in mind that you may be charged a fee commonly called a break cost or economic cost, should you decide to break your fixed term or switch to another product. You may also be limited in making extra repayments.

3) Standard variable-rate home loans

A popular mainstream choice, standard variable-rate interest and principal home loans allow you to borrow money for a set period of time, during which you make regular repayments. The interest rate can vary depending on fluctuations in the official cash rate, so it is likely to go up or down depending on the market cycle.

4) Split-rate home loans

Want the best of both worlds? A split-rate home loan offers both flexibility and security. A good product for both first time and existing borrowers, split loans allow you to customise your loan’s interest rate as you see fit: fixing a portion of your interest rate to give certainty to your monthly repayments during the fixed-rate term should rates increase, but also flexibility through taking out a variable-rate portion.

5) Interest-only home loans

Interest-only loans offer borrowers lower repayment options, while maintaining many of a traditional loan’s features. This type of loan allows you to pay only the interest component on a mortgage; it does not reduce the principal component. They are a popular choice for investors seeking good capital appreciation on their investments.

6) Low-doc home loans

If you’re self-employed, a contractor or a seasonal worker and do not have a regular income, a low-doc loan may best suit your situation.

 

Different home loan options may or may not suit you depending on your circumstances. It may also be a matter of personal choice, whether you prefer to fix in your rates for certainty, or prefer to stick with the market rate with a standard variable loan.

If you have any questions about loan types don’t hesitate to ask.

 

Want trusted advice on which loan type best suits your needs and circumstances? You can contact Doug at (e) douglas.piening@choicehomeloans.com.au or (m)  0408 671 524.

Douglas Piening is a Mortgage and Finance Broker with Choice Home Loans and is passionate about providing advice you can trust. Whether it’s buying a home, refinancing a loan, investing, building or renovating, Doug brings a wealth of knowledge and expertise to assist with your lending needs. 

Want to hear what clients have said about working with Doug? Take a look at these reviews from LinkedIn and Facebook.

This information is of a general nature only and does not constitute professional advice. You should always seek professional advice in relation to your particular circumstances.

 

Will interest rates increase in 2017?

Interest rates have been at historical lows for such a long time, home owners could be forgiven for forgetting what it is like for rates to rise.

 

In recent weeks though, major lenders have increased their fixed term rates, across several loan terms (two, three and five year terms). A rise in fixed rates usually signals a rise in the cost of funding, which may translate into rises in variable interest rates as well. Westpac, Bank of Melbourne, Ubank and Commonwealth have all increased some of their fixed loan products, some up to 60 bases points higher.

 

While you probably need a crystal ball to accurately predict if rates will rises or fall, there is increasing noise from some industry experts that variable interest rates will rise in the back half of 2017.*

If this the case, it will be the first time the market will have had a rate rise since November 2010.

Predicting whether the RBA will change the official interest rate requires complex consideration of the Australian economy in terms of inflation, industry sector growth or decline and unemployment or wages growth and the impact of the global economy. Against this backdrop though, there is the school of thought that there is significant risk in a continued lending boom which fuels housing growth and negatively impacts housing affordability.

 

So if interest rates rise what does it mean for you?

 

The impact of rate rises really comes down to your individual circumstances. Some of the things you could do to prepare for possible interest rate rises:

 

 Mini house with money on blue

Build yourself a buffer

One of the best things you can do to minimise the impact of a rate rise, is to pay off your mortgage faster than your required repayments and build yourself a buffer. That way if rates rise, you are paying less interest from either a reduced principle, or the impact of more money in your offset account. And if you find yourself in need of extra cash to make repayments, you have this available to you. It also gets you used to paying at a higher rate so you don’t feel the impact of any rate rises.

 

Interest Rates

Lock in a fixed rate

This may be an option for you if you want certainty and to hedge your bets against any rises. There are some disadvantages to locking in a fixed rate which you need to be aware of though, you can read more here on fixing loans. Given that fixed rates have already gone up though for many lenders, the horse may have already bolted. I am not the biggest fan of fixed rates but they can provide certainty for a locked in period of time.

 

Plan ahead

It can help to plan ahead to determine the impact on you if rates were to rise on your current loan. Look for an online calculator to see the impact on your repayments if interest rates were to go up, or ask your broker to calculate this for you. Would this amount cause issues with your current budget? Or are there are things that are changing for you in the future that might impact on your ability to pay your mortgage, like a new baby, or a change to your work circumstances? If you think there are things that might impact on your ability to service your mortgage you might want to look at possible strategies, like restructuring your loan.

 

We will have to wait and see if the predictions are true on rate rises. If you have any questions or need any information on current rates, please get in touch.

 

You can contact Doug at (e) douglas.piening@choicehomeloans.com.au or (m)  0408 671 524.

Douglas Piening is a Mortgage and Finance Broker with Choice Home Loans and is passionate about providing advice you can trust. Whether it’s buying a home, refinancing a loan, investing, building or renovating, Doug brings a wealth of knowledge and expertise to assist with your lending needs. 

Want to hear what clients have said about working with Doug? Take a look at these reviews from LinkedIn and Facebook.

This information is of a general nature only and does not constitute professional advice. You should always seek professional advice in relation to your particular circumstances.

 

Sources:

  1. http://www.domain.com.au/news/the-five-things-on-the-agenda-for-sydneys-property-market-in-2017-20161211-gt8v8g/
  2. http://www.afr.com/news/economy/get-ready-for-2017-reserve-bank-of-australia-rate-hikes-says-oecd-20161128-gsz5k4
  3. http://www.afr.com/real-estate/residential/syd-melb-house-prices-to-rise-but-building-boom-to-end-hsbc-20170110-gtopcs
  4. http://www.abc.net.au/news/2016-12-09/interest-rates-on-mortgages-likely-to-rise/8106180