Last Updated Aug 2, 2018 · Written by Craig Gibson
Choosing a home loan or mortgage can be a daunting prospect, given the number of products on the market.
Besides selecting a specific type of loan, you also need to think about things like the prevailing economic climate, interest rate movements and your ability to repay the loan every month. Before you sign on the dotted line ensure you evaluate the agreement thoroughly, particularly the terms and conditions, or small print that typically accompanies a loan. These have the potential to offer you a host of flexible features, but are equally able to limit your options with potentially negative financial implications.
First let's take a look at the type of home loans you will need to choose from.
The following are some of the most common types of home loans or mortgages available on the local market:
This is the most popular type of home loan and tracks prevailing interest rates, as set by the Reserve Bank of Australia. If interest rates fall your monthly payments go down, and if they rise, so do your payments. A variable rate loan also often has the flexibility to make additional payments, redraw money and sometimes comes with a lower introductory rate.
In this type of loan the interest rate is fixed for anywhere from one to five years. Fixed rate loans are a good option if you think interest rates are going to go up. It also gives you a good idea of your outgoings, and allows you to plan your budget for the period of the loan. The downside is that if interest rate falls you miss out on this saving. You may also be limited in the amount of additional payments you can make - which could lengthen the time you take to repay the loan.
Split loans are a combination of the above two types - fixed and variable, and you have the option of selecting what portion to allocate to each. This is a best of both worlds approach – with some protection from rate rises and some certainty with regards to medium term budgeting.
If you want to limit your repayments to the bare minimum, with interest calculated on the principal only, then this loan offers this flexibility for a fixed period of time. Thereafter you need to make payments on the principal and interest.
It is imperative that you research your loan thoroughly before signing your life away. Make sure you pay particular attention to the following loan terms or features and determine if they suit your needs and circumstances:
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Switching home loans could help save you thousands of dollars in interest and maybe even help you pay off your home loan early. But before you take the leap make sure you shop around and research what product is right for you, and do the sums to see if it makes financial sense to switch.
When evaluating a new home loan make sure to look at:
This article is only intended for your general information, you should ask your home loan provider for a full summary of the terms of the loan. You could also get legal advice if you do not understand the full terms of any loan product.