Australia is one of the leading countries in terms of home ownership on the planet. That being said, it isn’t always so easy to get Australian property in your name. The home loan process isn’t as easy as you’d think, either. So before you go with the first home loan that you find, be sure to spend time evaluating whether it’s the right one.
Which interest rate is best?
There are three basic types of interest rates for home loans: variable, fixed, and split. The variable rate is going to give you the most flexibility because the rate is subject to change at any time. The rate depends on the Reserve Bank of Australia’s cash fund as well as the current health of the economy. This can seem rather risky, but most of the time you’ll be able to get lower interest rates than you would with a fixed rate. Additionally, you’ll have access to more features such as extra repayments and redraw facilities.
Fixed home loans do just what they say they will – you know exactly the rate you will be paying at. This is great for people who need to know how much money they will be paying towards their loan for the first few years. You won’t get as many features as you would with a variable rate and break costs are definitely higher, but there will be some degree of stability that may work to your advantage. After the fixed rate period is over, you can consider switching to a new repayment plan or fall back on the standard variable revert rate.
Split rates take the best of both variable and fixed rates. A portion of your home loan will be paid at a fixed rate, while the rest is paid at a variable rate. You’ll also get to take advantage of extra features if your variable portion allows for it.
What if I’m on a tight budget?
Some people find it difficult to pay the advised twenty percent deposit. However, it is possible to look for a property that requires a lower deposit of even five percent. The loan will be spread out over a longer period of time, and you’ll have to pay lender’s mortgage insurance to protect the provider, but it is an option. A longer loan will allow you to pay less each month. You can extend your mortgage to even thirty years. It’s a good option for people who are unable to pay big amounts every month, but it’s important to note that you’ll have to ultimately pay more overall.
How do I minimize interest and home loan fees?
The application fees can go up to a thousand dollars, but you don’t have to worry about that cost nearly as much as you have to worry about service fees. Unless you are maximizing the use of loan features, it may be a better idea to choose a loan with no service fees and less features. There are certainly some loans like this out there – you just have to look for them.
An offset account can help you minimize the amount you pay on interest. All you have to do is make sure your income goes into an offset account attached to your home loan. The amount that is subject to interest will be reduced by the amount of money in your offset account, meaning you can pay interest for a lot less.
One great way to reduce the life of your loan is to make more repayments. The earlier you manage to pay off your property, the better. It may be a good idea to look for a home loan that accepts free extra or lump sum repayments so that you can slowly reduce the life of your loan month by month.
Finally, consider paying fortnightly instead of monthly. There are twenty six fortnights in a year but only twelve months. By paying fortnightly, you’re essentially reducing your loan by a month each year. This will reduce the life of your loan and reduce the interest you have to pay in the long run.
How do I choose the features I want?
Redraw facilities are great if you need a little extra flexibility. It allows you to take back any extra repayments you made. In the case of an accident or even a wedding or a baby, this can help you out quite a lot.
Home loan top ups will be useful if you plan to renovate. After you have built up some equity in your home loan, you are able to borrow additional money for renovations.
Repayment holidays basically allow you to opt out for a short period of time. Of course, the life of your loan will be extended, but having the extra cash can go a long way when you are hard-pressed for money such as when a new baby is in the family.
Ultimately, the features that you want will depend on your needs. The same is true for the home loan. So consider your specific situation, weigh your pros and cons, and settle on the one that is best for you.