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Whether you’re buying your first home,
upgrading, refinancing, investing in property
or wanting to pay off your existing home
loan sooner, there are many options available
when choosing a home loan. Because your
home loan will probably be your biggest
expense it is important that you
obtain the
best advice and make a decision based on
the option that best suits your personal
circumstances.
Interest only loans vs principal and
interest loans
The choice between interest only loans and
principal and interest loans should reflect
your personal circumstances. Repayments on
interest only loans will always be lower than
principal and interest loans but there is the
disadvantage of not reducing the principal
loan amount. The flexibility of being able to
make extra repayments in good times is an
attractive option for interest only loans. Most
home loans have the facility of being able
to make additional repayments without a
penalty.
Honeymoon loans
A loan with lower repayments for the lender’s
preliminary period. After the ‘honeymoon’ the
loan becomes a standard variable loan and the
repayments increase. Make sure that you can
meet the higher repayments for the remainder
of the loan. You could also be faced with a fee
at the end of the honeymoon period to switch
to another loan type.
Basic or ‘no frills’ loans
A variable rate loan with a relatively low
interest rate. The low rates for these loans
could mean that you can repay the loan faster
because there are no extra options available.
Repayments will rise and fall with interest
fluctuations. Remember to check that the
loan conditions will suit your circumstances
– particularly the ability to make additional
repayments and payout without a penalty.
Standard variable rate loans
These loans are the most common type
available. The variable rate loan offers more
features and flexibility than the basic or ‘no
frills’ loan, so the rate is usually slightly higher.
The extra options can include:
•
a redraw facility,
•
the option to split between fixed and
variable,
•
extra repayments, and
•
portability.
These options should be taken into account
when choosing your type of variable loan.
Repayments will vary as interest rates
fluctuate.
Fixed rate loans
These loans are set at a fixed interest rate for
a specified period - usually one to five years.
The advantage of allowing you to organise
your finances and repayments without the
risk of rising interest rates is offset by the
disadvantage of not benefiting from a drop
in rates. At the end of the term all fixed loans
automatically revert to the applicable variable
rate. At this stage you have the option to lock
in another fixed rate for a new term, switch
to variable or go for a loan where you split
with a percentage fixed and the remainder
variable. However these loans may have
limited features and lack the flexibility of 100%
variable loans. There may be early exit fees and
limited ability to make extra payments.
CHOOSING THE RIGHT LOAN
