Although you may have believed that signing yourself up to a huge loan and taking on the responsibility of home ownership was the biggest challenge you would ever face, the truth is, the biggest challenge is finding a home loan that suits you, your needs and your lifestyle. The mortgage market isn’t exactly easy to understand, so Lendi co-founder and managing director, David Hyman, has put together some tips on things you need to consider when choosing a home loan option.
Fixed interest rate vs variable interest rate
“You can choose to pay the interest on your loan in a number of ways. Ask yourself whether you require the stability of a fixed rate over the flexibility of a variable rate.”
- Variable rate loan These loans have variable interest rates that rise and fall with market rates. These loans generally give you the option to make extra repayments.
- Fixed rate loan Loans with fixed interest rates have a set interest rate, generally for one to five years. Keep in mind you won’t be able to benefit from falls in interest rate and they can be costly if you want to refinance during the fixed rate period.
- Split loan You may also want to consider a split loan which is essentially a combination of a variable rate loan and a fixed rate loan.
Principal and interest repayments vs interest only repayments
“How you repay your loan can have a big impact on your finances. You’ll be asked if you want to make principal and interest, or interest only repayments.”
- Interest only You only pay off the interest charged on your loan, rather than the loan itself, for a set period of time (typically one to five years). It generally means you’re not repaying the loan at all in this period and will pay more interest in the long run.
- Principal and interest This consists of both the amount you initially borrowed (the ‘principal’) and the interest (or cost of borrowing). This option means you pay less interest overall and will own your home outright sooner.
Other home loan features to consider
- Offset accounts This is essentially a savings or transaction account linked to your home loan. It’s designed to reduce the amount of principal upon which your interest payable is calculated, and therefore reducing the interest you pay. These accounts give you unlimited access to your money but generally do not give you the option to make additional repayments.
- Redraw facilities and making extra repayments This lets you make extra repayments and then access these repayments at a later time if you need the funds. It’s worth noting that fixed rate loans typically don’t have extra repayment functionality.
- Home loan portability If you think you might move house in the next few years, a home loan with this feature will allow you to avoid break cost fees if you want to hold onto your loan when moving to a new property.
- Repayment holidays A small break period from making repayments when your cash is needed elsewhere, such as taking time on parental leave.
- Repayment frequency and schedule More frequent repayments, such as fortnightly rather than monthly, can mean a saving in interest in the long run since lenders calculate interest daily. Remember to choose a repayment schedule that suits your own lifestyle and income.
- Online access The ability to access your home loan account to check your balance or make any changes can be a useful feature.
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