Available Loan Options to Finance Your Dream House
Everybody has a dream and, while dreams can vary from person to person, the one thing that remains constant is the need to fund your own home. Finding the right loan for your circumstances can sometimes be a challenge. Before getting started, there’s a few basics you should cover.
Principal & Interest vs. Interest Only Home Loans
A principal and interest loan is one where your regular payments cover the interest on the loan as well as chipping away at the actual loan (the principal). These loans are usually set up so that it will be paid off over a 20 to 30 year period.
Interest only loans are where you agree with the lender to only pay the interest on the loan. These agreements will be for a specific amount of time (usually between 1-5 years) and will usually mean that your repayments are lower which can be helpful during a period of uncertainty in your position.
A shorter loan term (e.g. 20 years) will mean your loan is paid off sooner however your repayments will be higher. An interest only loan may help you get into your first home, however it means it may potentially be longer until it is paid off. Everyone’s circumstances are different and which type of loan is best will vary depending on your situation.
Fixed vs. Variable Home Loans
A fixed home loan means that you lock in a particular interest rate for a specific period of time (usually 1,3 or 5 years). If you fix your interest rate it means that your repayment amounts will not change and if interest rates do increase you’ll reap the benefits of having a low interest rate locked in.
A variable home loan is one where your interest rate changes based on market interest rates meaning that you actual repayments are subject to change. When you apply for a loan you will notice that variable rates are usually lower than fixed rates. In addition, there is a lot more freedom with a variable rate including being able to make extra payments, utilising more features such as being able to refinance.
On top of this, you can get a ‘split home loan’ where a portion of the loan is fixed and a portion is variable and you decide what the split amount is (e.g. 80/20).
With both scenarios there will always be trade-off’s and it is up to you to decide whether certainty of repayments is more important than flexibility.
Offset vs. Redraw
Think of an offset account as a separate savings account. Essentially any money in this account ‘offsets’ the amount of your home loan that you are paying interest on. For example:
If you have a $500,000 loan with a 4% interest rate, your repayments would be $2,388 per month on a 30 year loan;
If you had the same loan but with $100,000 savings in an offset account, you would only be paying interest on $400,000 and therefore your monthly repayments would be $1,910 per month.
The offset account is fully accessible as it simply a savings deposit account and because of this there are a number of strategies you can implement that over time will result in considerable interest savings.
A redraw facility is not a separate account and is instead considered a ‘feature’ of your home loan. It allows you to ‘re-draw’ extra payments you’ve made towards your home loan and is usually not as flexible as an offset account.
If the property in question is an investment property, there may also be tax implications however this would require specific advice.
This information is general in nature and was provided by Fiduciary Financial Services Pty Ltd AFSL 247344. www.fiduciaryadvice.com.au
General Advice Warning
This information may be regarded as general advice. That is, your personal objectives, needs or financial situations were not taken into account when preparing this information. Accordingly, you should consider the appropriateness of any general advice provided as part of this information, having regard to your own objectives, financial situation and needs.