So, you’ve decided you’re ready to buy a place, and it’s time to get a home loan, but there are so many to choose from, how do you know which one to choose?! With so many options for home loans, it can be tricky to know which one is best for you. Plus, there’s all the terminology, which can also lead to some confusion! Fear not though, for we have some answers for you.
Do the homework
As with any endeavor that involves large sums of money you want to approach the subject with the most amount of information that you can possibly gather. The more pertinent information you have on any given subject the better off you’ll be. Finding the right home loan is of course no different and it is important to utilise all available online resources to help you understand everything you need to know about mortgages. To shed a little more light on the subject, we’ve summarised and broken down the most common types of home loans offered, so you can have a better idea of which type is best suited for your family and lifestyle.
Fixed rate loans
A fixed rate home loan means that the amount of interest you will be required to pay is fixed for an allotted amount of time – usually as an introductory rate at the beginning of a loan and lasting for between one and five years. After this time the loan often changes to a variable rate loan. Fixed rate loans can make a lot of sense for those starting out or getting their first mortgage as they can make budgeting for the loan simpler, as you know the set amount you will need to make each repayment. Fixed rates also mean that interest rate rises won’t affect you, however, this also means that interest rate drops won’t affect you, so it can be a little bittersweet, depending on the financial climate at the time. Fixed rate loans can also come with a break fee that may be charged if you wish to change loans or pay off the remainder of your loan during the fixed period.
Variable rate loans
Variable rate home loans mean the interest on the loan varies with the market interest rates. This can mean great news for you if the interest rates drop, but if they rise, so too will your mortgage repayments. One perk of variable rate loans is that they usually allow you to make extra repayments at no extra cost. This can be handy if you come into some money or begin earning more, and can mean you are able to pay your loan off quicker. These type of home loans often also make it easier to switch to a different loan, if you so choose, than their fixed rate counterparts. The downside to these loans is that their changing nature can make it tricky to know how much to set aside for the mortgage, which can lead to stress if you’re on a tight budget.
Interest-only loans are usually offered for an introductory period. During this time, you only pay the interest on the loan, rather than the interest plus the loan amount outstanding. This can be a good option for people who are concerned about the sudden requirement to pay a mortgage, as it means you will have lower repayments at the commencement of the home loan. Interest-only loans can also be a top choice for investors, as they allow for the maximum amount of tax deductions. One of the negative points regarding this type of loan is that it will lead to you having to pay more interest in the long-run (compared to a loan that is principal and interest from the start). This is because it will take longer to pay off an interest-only loan, as for a set amount of time, you’re not paying off the principal on the loan. Be careful not to be caught out when the interest-only period ends, too. After the period has ended, you will be required to pay both the interest and principal of the loan.
Principal and interest loans
A home loan that includes the principal and interest means you will be paying off the principal (the amount that you borrowed) and the interest on the loan, together. Although these loans start off with repayments that cost more than interest-only loans, this can be a positive feature in the long run, as it means you will be paying your loan off faster than if you opted to go for an interest-only option. Another benefit of a principal and interest loan is that you can get into the habit of paying off your home loan in this form from the start, rather than with an interest-only loan, which may cause financial stress when repayments increase as it switches to principal and interest.