With so much information about mortgages available it’s easy to get overwhelmed by conflicting reports, but taking on a mortgage and choosing a mortgage broker shouldn’t be confusing. To help you understand the basics of home loans, the following information should help you enter into your mortgage agreement with more confidence and the right research behind you to help you choose the best possible mortgage deal.
Loans and Products
Depending on the type of loan you explore, there are different features that suit different financial structures. Understanding the options available is a solid foundation:
Variable home loans are among the most popular loan product around. Why? It’s all about the repayment flexibility and extra account features.
If you choose a variable home loan, your interest rate will increase or decrease in line with fluctuations set by the Reserve Bank of Australia (RBA) and pressures on individual banks funding lines. Talking to an experienced mortgage broker to fully explain what this means for your budget will help you understand if it’s the best home loan option for you.
Choosing a fixed rate means you enjoy the stability of knowing exactly what your loan repayments are each week/fortnight/month over an agreed loan term.
When your mortgage is a fixed rate home loan, your interest rate is fixed for a set period – typically one, three or five years.
Fixed rate loans rarely offer offset facilities, but there are a few exceptions.
Split home loan (fixed and variable)
Splitting the loan gives you the best of both worlds – choosing to pay some of your home loan back with a fixed interest rate, then dealing with the rest on a variable rate. The proportions of the split are up to you. if the interest rates do change, only the variable component of your mortgage will be affected.
Line of credit
This is a maximum limit that your lender will allow you to maintain. You are then able to draw down on the line of credit at any time, as long as you don’t exceed the agreed maximum.
One key benefit to having a line of credit is that you only pay interest on the drawn amount. It’s one reason it’s a popular choice for investors who want access to equity from one property to use as a deposit for another property.
There are loans that enable you to buy within your self-managed super fund (SMSF). Talk to your trusted mortgage broker to see if you qualify and make sure you understand the limitations and all the set-up costs.
This is the amount of money you borrow from your chosen lender when you take out a home loan.
This is the fee your chosen lender charges you for the opportunity to utilise their money.
Loan to value ratio (LVR)
This refers to the relationship between the amount of money you borrow, and the value of the property you buy.
Typically, a lender will demand you have a 20% deposit, leaving them to lend 80% of the property value. If your deposit is less than 20%, you are usually required to take out lender’s mortgage insurance (LMI).
Lender’s mortgage insurance (LMI)
This is a one-off insurance payment that protects your lender if you default on your repayments.
By creating an offset account that links to your salary or incoming funds, your credit balance is offset daily against your outstanding loan balance. This helps to reduce the interest payable on your home loan.
By making extra repayments on a variable rate mortgage, you can have the option to redraw that additional money if you need it. Talk to your mortgage broker to understand your options and compare to an offset account.
First-home buyers often access this option that enables a family member to offer their property as additional security to your home loan. Even if your family member already has their own existing mortgage, they may be able to take a second mortgage. Legal advice around this option is critical for all involved parties.
For more information about how to apply for a mortgage and what mortgage might be best for you, talk to our home loan experts at Lending Specialists.