Home Loan – What Is It and How It Can Help You?

what is a home loan
Finance

Growing up we’ve been told that buying a house is a better financial move than renting. It’s common advice that we hear frequently and now, you’ve decided it’s the right move for you.

 

This is one of the biggest decisions you’re going to make in your financial life. You’ll want to make the right choice in terms of choosing your home loan. So, let’s tackle everything you need to know before settling on a home loan.

 

What is a Home Loan?

A home loan or mortgage is a loan advanced to you by a lender so you can purchase a property. It is an agreement between a lender (usually a bank, credit union or building society) and a property owner.

 

The loan is due to be repaid within the agreed period, with the property held as security. This means if the borrower fails to do their repayment obligations, the lender has the right to repossess the property.

 

To put it simply a Home Loan Is:

  • Taken out to purchase a home.
  • Uses the value of the property as collateral
  • Usually repaid over a period of 25-30 years.
  • Either has a fixed or variable interest rate

 

Types of repayments

  • Principal and interest loans

If you choose this type of repayments, you’re going to make regular repayments on the amount borrowed (the principal) and your loan interest. You pay off the loan over an agreed period of time (loan term), for example, 25 or 30 years.

 

  • Interest-only loans

For an initial period, your repayments only cover your loan’s interest. You aren’t paying off the principal you borrowed, so your debt isn’t reduced as you make repayments.

 

It’s important to keep in mind that your repayments are lower during the interest-only period, but they will go up after that. Make sure you have the right cash flow to make your repayment obligations.

 

Types of interest rate

  • Fixed-rate

This type of interest rate stays the same for the whole duration of the loan. The rate then goes to a variable interest rate, or you can negotiate another fixed rate.

 

ProsCons
Makes budgeting easier as you know what your repayments will be.You won’t get the benefit if interest rates go down.
Fewer loan features could cost you less.It may cost more to switch loans later if you’re charged a break fee.

 

  • Variable interest rate

A Variable interest rate fluctuates according to the lending market changes (for example when official cash rates change).

 

ProsCons
More loan features may offer you greater flexibility.Makes budgeting harder as your repayments could go up or down.
It’s usually easier to switch loans later if you find a better deal.More loan features could cost you more.

 

  • Partially-fixed rate

If you want the best of both rate types, consider a partially-fixed rate. With this type of rate, a portion of your loan has a fixed rate and the rest has a variable rate. You can decide how to split the loan. It can be either 50/50 or 20/80. It’s your choice.

 

Applying for a Home Loan

  • Save for a deposit – Most lenders require borrowers to save a deposit before applying for a loan. The Australian Securities and Investment Commission advises to save up at least 20% of the value of the property. This will help the borrower avoid paying for lenders’ mortgage insurance. If a borrower has less than 20% of the value of the property in their deposit, this may have an impact on their interest rate.

 

  • Complete the application – Lenders will require borrowers to provide proof of identification and income. You need to have these two ready for a seamless application. Once your loan is pre-approved, you can start looking for the perfect property that fits your budget.

 

  • Find the right property – After you’ve chosen the perfect property for you, go back to your lender so you can finalise the agreement and decide your loan features. Usually, borrowers offer the property as security to keep the interest rates low. This means that if you fail to do your repayment obligations, the lenders may repossess your property.

 

  • Get the timing right – When you are looking to buy a house, it’s advisable to get your home loan pre-approved before you start looking at properties. That way you can know your budget. And when its time to purchase the house, you’ll quickly be able to do so with the bank.

 

 

 

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