Finding the home of your dreams or a great investment property is
just one step in the home purchase process. Sourcing a home loan is
very important part of the process but in many ways it can be the
most confusing. Home ownership is a not just an aspiration for many,
it has become somewhat of a national obsession which has given rise
to a preoccupation on property prices and interest rates.
Home loans are a long-term commitment stretching over 20, 25, 30
years, so it’s important that you get it right mortgage at the
The main components of a home loan are:
- Principal: the amount you are borrowing
- Interest Rate: the rate of interest you will be charged by the lender to borrow the money
- Application Fees/Loan Establishment: some lenders will charge a fee for setting up a home loan
- Ongoing fees: some lenders may charge a monthly fee for administration costs on your home loan
Interest rates dominate the news headline and home loan seekers are more than ready to soak up the detail. Interest rates are a very important component of a home loan but you need to understand how they work in the overall loan cost. By fixating only on the interest rates you may get a shock when other fees and charges and loan conditions are factored in.
Home loans can be at fixed or variable interest rates.
Types of Home Loans
There are 2 main types of home loan structures:
- Interest and Principal Home Loans: this is the most common home loan structure and involves paying a monthly payment which comprises both principal and interest.
- Interest-only Loans: for say the first few years of a loan, the repayments are structured to only cover the interest on the loan. After that period the repayments will likely increase to cover repaying the principal.
Hints for Optimising Your Mortgage
- Shorter loan term pays off the mortgage sooner and you pay less in interest, but repayments are higher. If you can stretch to a higher repayment, this will have you owner your home sooner.
- Lowest interest rate: this is a no-brainer. You want to source the lowest interest rate so your overall loan cost is minimised but you need to take into account fees and charges. Look into the detail of lenders offering zero cost home loans.
- Deciding on a variable v fixed interest rate mortgage is a major decision. With a fixed interest rate you may miss out on repayment reductions if interest rates go down but you do have a fixed repayment over a long term which assists with budget planning. With variable interest rates you’re at the mercy of the markets. When rates go down your repayment goes down, when rates go up so does your repayment.
- Hint: it is usually easier and less expenses, ie less break fees, to switch loans if you have a variable interest rate loan.
- Home loans that have a lot of options and features that may seem attractive at the time, may add up to extra costs over time. If you are considering features such as an offset account, line of credit or redraw facilities, look into the costs and weigh up the pros and cons.
- Many banks and lenders offer home loans with their interest rate the key to their advertising. With so many options to consider, most home buyers opt to use a mortgage broker to handle their home loan.
Using a Mortgage Broker
- Using the services of a mortgage broker can be a very wise decision as they are finance professionals that understand the terminology and should be able to explain the terms, costs and options in a clear and easily to understand manner.
- Hint: make sure your broker is independent and not just an agent or representative of a bank or finance company. Independence means they will survey a wide range of mortgage options to source you the cheapest and most appropriate home loan for your circumstances.
- Hint: ensure your broker is licensed by checking the register on the ASIC website. Go to ASIC Connect Professional Register to search.
- Hint: get a written quote from your mortgage broker.
If you would like to speak with a mortgage broker about a home loan, we know people who operate in this area and can provide you with their details. Contact us for this information