In our previous post: Understanding Interest Rates and How They Impact Your Home Loan, we discussed how important it is to know what you are paying when it comes to your loan agreement. You must read over the fine print and commit to the terms and conditions you are undertaking.
Banks and lenders have a lot of control when it comes to applying home loan rates, so knowing where you stand and what to expect gives you better control when it comes to finding the best match for your unique financial situation.
It’s always best to get the support and advise of a financial specialist before you decide to enter a home loan.
Financial professionals will be the best people to look over your credit history, savings and income to be able to make suitable recommendations for what you can afford. To get the correct advise, it’s best to disclose all information you have on outstanding debts or expected changes to your financial situation. This is about your future lifestyle, so it’s in your best interest to be honest and be open to any feedback offered on what you can do to take control of your finances and prepare your finances to include repaying your mortgage as part of your overall budget.
For unbiased, obligation-free information you can get professional advisee from an advisor who doesn't work for a bank or lender.
That leads us to this blog which details the home loan options available to you. When you understand your options, you can find a great fit for your budget and lifestyle.
When you have a basic understanding of interest rates and how they work you can go into your financial discussions with your preferred brands, knowing what to ask and what to look for.
Here we will discuss Fixed Interest Rates, Variable Interest Rates, Principal Interest and Interest Only. We’ll finish by explaining the comparison rate and how this works to help you weigh up which loan will work best.
A variable interest rate can go up and down at any time. Fluctuations can be directed by the lender themselves or they may be made in response to a cash rate change put in place by the Reserve Bank of Australia (RBA). As stated in the previous blog, the RBA’s interest rate monthly statements are not directions the bank or lender must follow. As well as being able to set their interest rate, they do not have to have a policy in place with you that sets any kind of pattern to their behaviour or makes the rate predictable at all.
There are benefits to this loan type. Typically, this rate is advertised as lower than fixed (however in recent times some banks have bucked this trend to attract customers) but you can also expect more flexibility and more features. There are usually no penalties for making additional repayments, so for those who wanted to pair the loan with an offset account or adjust their payment plan and increase the frequency of their payments they can choose this plan to pay off the loan faster and get the benefits of reduced incurred interest as they go.
A fixed-rate will remain the same over an agreed term. It might not be the length of the loan, it will depend on the terms of the lender and your overall loan structure. A usual term for a fixed rate is one to five years. This means you get that rate regardless of the cash rate. The benefit of this is consistency so that you can plan and budget exactly what your returns will be well in advance.
Once the fixed term period is completed you’ll return to the variable rate and be able to negotiate another fixed term agreement with your lender.
If you are not sure what loan suits you best or don’t want to put all your eggs in one basket you can ask about splitting your loan across both options. Some lenders do provide the additional choice of splitting your loan so that one portion operates on a variable rate and the rest on a fixed rate term.
There have been instances in the past and there will be instances in the future where unusual circumstances make for unusual lending allowances. Do you jump in and invest in uncertainty? It is so important to take your position into account before taking up unusually low offers. While interest rates are not known month to month it is possible to forecast them based on the Australian economic performance, for the foreseeable future at any rate. With the state of the Nation in 2020, continuing into 2021 after incredible financial upheaval in the hospitality, tourism and education departments, and the uncertain future up to and including initial COVID vaccinations, banks and lenders feel pretty secure about interest rates continuing to hold at record lows for some time. This is why some banks have been able to offer fixed loan rates that are lower than variable ones.
The danger here is that you can overspend on your budget and buy into a loan that looks amazing, but overall, it is outside a comfortable repayment plan for you either now, or over the life of the loan.
There is more to take into account than just the rates provided. There is also your future financial standings. While some changes in your future will come out of the blue, there are others you can estimate and others where you have goals for things to be different in the next few years. For example
- If your income is single or joint
- Your relationship status
- Any plans to move interstate
- Any plans to sell the home
- Where you expect your employees to take you over the next five to ten years
- Any plans to invest in an investment property after this one
If there are any possible changes or plans for a different direction, it’s important to factor them in before you commit to your loan repayments. Even if your plans aren’t set in stone, have a backup for how things will look in the new situation and how it will influence your ability to pay back your proposed loan. Knowing this in advance can allow you to include strategies within your loan for changes that might need to take place down the track, i.e. you want to start a family, and what flexibility the loan terms may offer or what penalties might be included if you are forced to make changes.
Another factor people tend to overlook is their personality type. For a steady stable personality type who doesn’t like surprises and may become stressed about change, a variable interest rate probably isn’t a great fit. For someone who likes surprises and can be flexible, then a variable interest rate might be appealing.
When it comes to your interest rate choices, it’s not all about financial standings, you need to take your personality into the equation as well.
You are the one responsible for making your home loan repayments, which means you need to choose an option that not only reflects your budget but also reflects your personality. That way you will stay engaged and unemotional, giving you more professional standing and ample opportunity to take the reins.
There are options when it comes to what you pay. Interest-Only Loans means you do not repay your loan, you only pay interest on the loan amount. The advantage of this type of payment is it reduces your monthly bill, significantly. The big downside is that you increase the length of your loan and you will pay a significant amount of extra interest overall, especially if your interest rate was above average to start with, as it can sometimes be in interest-only loans. While it might be tempting to suspend your loan repayments, the sacrifice is steep and not in your best interest in the long term.
If you find yourself struggling to make repayments and you need a break from your loan while you reassess your finances, this may be an emergency-only option. Make sure you talk to your lender about what emergency options they have and be sure to get back into your full repayments as soon as you can.
The typical agreement for these types of loans is a five-year term. Consider that you are giving the lender your money for five years without having any impact on your loan.
The other trap is getting used to a lifestyle with lower repayments, making it hard for some people to adjust to principal and interest repayments when the agreed period is over. You will need to make your full loan repayments at some point, so it’s worth biting the bullet and finding a financial solution that allows you to pay back your loan from the very beginning.
The Principal and Interest Loan amount is the full repayment of a portion of the borrowed amount and the interest charged by the lender. These are regular payments each month. You will agree with the bank on the length of time you wish to take to repay the loan, i.e. 30 years, and that will determine how much each monthly amount will be to have the debt and interest returned in that timeframe.
It can be hard to compare offers from different lenders because the inclusions and fees that come with the loan are completely different.
Fees can be significant and need to be factored in as part of the loan costs when you are deciding on your budget and what loan you can afford.
While it’s a good idea to compare interest rates to get an idea of what providers are selling, when it comes to choosing the best loan provider for your situation, you’ll need to dig deeper.
Luckily, lenders will do the hard work for you and supply an average percentage figure so you can weigh up what’s what from lender to lendee without having to factor in all the variables.
The comparison rate figure is calculated using all the costs and fees and dividing it to display an overall percentage. It includes additions of monthly account fees, establishment charges, evaluation and settlement fees, as well as the interest they charge. The idea is that all lenders will be able to offer one number that combines the full costs of a mortgage, condensed to one sum, so you can compare the market with a single sweep.
This is considered to be an accurate way to look at the greater loan costs than just the interest alone.
There are some costs that banks do not include in the comparison rate equation. These include government stamp duty, conveyancing fees, and penalty fees for leaving to go to another bank. They also don’t take extras like offset accounts into consideration. It is well worth having your tracking system for these and all charges so that you can track expected costs against real costs, and stay on top of your property repayment plan.
Once you know what is available and where the costs are you can look to find a loan that will best suit your needs and create an agreement with the lender that puts a property within your reach.
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