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Home Loans – Understanding the Basics

home loans There are a range of home loans available in Australia, so it can be hard to understand their features and whether they are right for you. Here we explain all you need to know... Variable loans Variable loans are loans that are subject to interest rate fluctuations. Whenever interest rates increase or decrease, you will end up paying more or less for your loan, depending on what the bank has decided to do. A typical owner-occupied mortgage is taken out over 25 or 30 years, and although you can reduce the overall term by making higher or more frequent payments. Mortgages are either based on principal (the amount borrowed from the bank) and interest (the amount that will be paid back for having borrowed the money) loan repayments, or interest-only repayments (available for 1-5 years for owner occupied loans and 1-10 years for investment loans) where none of the principal component of the loan is paid down. Fixed loans Fixed loans will allow you to lock in a specific interest rate over a set period of time, generally between 1 and 5 years. This loan is popular among borrowers who want to ensure their repayments do not rise. The main risk is that if the variable rates fall, you are locked in at a higher rate. The cost of breaking a fixed rate loan contract can be substantial and there can be financial penalities for making additional payments. Split-rate loans You can take out a mortgage with one portion of the loan variable and the other portion of the loan fixed. In many ways, this will offer the best of both worlds and you have the flexibility to repay more on the variable loan and reduce the risk through the fixed loan. Low-doc loans Mortgage lenders will require you to provide evidence of your ability to meet loan repayments but this can be a problem for non-salaried works such as those who are self-employed. Low-doc loans require less proof of income paperwork but the interest rate is often higher than the standard variable rate. Professional or packaged loans Some mortgage lenders offer mortgages that provide 'lifetime' discounted interest rates, fee waivers, linked savings accounts and credit cards. These options are generally offered on high loan amounts. Non-genuine savings loans Mortgage lenders prefer borrowers to show they have the ability to save funds over time to cover repayments. If a deposit is accrued quickly due to an inheritance or from other sources, lenders may provide less funding and require lenders mortgage insurance. Lenders mortgage insurance is a one-off insurance payment that covers the bank in case you can't make your repayments. It is usually required for home loans with a loan-to-value ratio (LVR) over 80%. Construction loans Construction loans allow the amounts of finance to be drawn down progressively to cover the various stages of a construction project. Repayments (generally only on interest for the 12 months then principal and interest afterwards) are only made on the amount of the loan facility that has been drawn down. There are line fees on the undrawn amount or in most cases on the total facility limit. Line-of-credit facilities This is a way of tapping into equity in an existing home and drawing down funds as required for different purposes, such as renovations. Similar to a credit card, repayments are only made on the amount drawn down. These loans are often interest-only for a significant period, but can revert to principal and interest repayments in the future. Most mortgage lenders charge extra for line of credit accounts either through a facility fee, undrawn fund fees and/or higher interest rate. Bridging loans Bridging loans are designed as a short-term financing option for borrowers who need funding to buy a new residence before selling their existing home. The interest rates on these loans are higher than the standard variable interest rate. SMSF loans The rules around borrowing funds within a self-managed superannuation fund are complex. Borrowings with a SMSF must be undertaken through a limited resource borrowing arrangement, which will limit the resource of the lender to a single asset. With mortgage lenders offering so many different products, getting professional advice is a must! A mortgage broker will support you with recommendations about what is best for you based on your personal circumstances. For more information on home loans, talk to a mortgage broker today.

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