What a difference 1% makes! Let’s say I take out a home loan for a lovely apartment in Mornington with glimpses of the sea for $500,000. I pay the loan off over 30 years; the interest rate I’m paying is 4%; I can expect to be paying $359,348 in interest. Are you shocked?! Let’s keep going; how about at 5%? Are you sitting down?… $465,999 in interest. It’s in your best interest to make sure you choose a loan that works for you.
What are the difference between housing loans?
Variable rate home loans – A variable rate home loan will fluctuate according to the market index, as set by the Reserve Bank. Meaning that your monthly payment will go up and down accordingly; if the market index falls your payments will become lower and vice versa. An advantage of having a variable rate home loan is you can make additional payments.
Fixed rate home loans – With a fixed rate home loan your monthly payment remains the same for the term of the fixed rate. Your loan will state how long you have a fixed rate; it may be 3 years, 5 years or even for the term of the loan. This results in your monthly repayments being the same over the term. Many lenders will charge a fee if you make extra payments during your fixed rate term.
Partially fixed rate – Alternatively you may choose to have some of your home loan with a fixed rate and some with a variable rate. This will omit the concern of fees if you make any additional payments.
Introductory Rate home loans – This means you get a discounted rate for an initial period of time; it may be 12 months, maybe less and maybe more. Remember that your loan will revert to a variable rate once the honeymoon period is over. Some lenders may cap the amount of money you can pay off your home loan during this period.
Interesting…The Reserve Bank plays a critical role when it comes to determining our interest rates. The board of the Reserve bank meet every first Tuesday of the month except for January to discuss Australia’s monetary policy and consider if the cash rate should be changed to help manage economic inflation. What does it all mean? Well the banks generally have their home loan rates about 2 – 2.5% higher than our cash rate; for example our cash rate is currently 1.5%, therefore you would expect that loans would be around 3.5 – 4%…sounds about right!
Home loan interest rates aren’t the only consideration when choosing a home loan. You need to consider if you will take out a principal and interest home loan or an interest only loan, and if you require redraw facilities or an offset account. There are several options available to meet your needs. However, extra features may lead to extra costs.
Another big decision is how much to borrow. You will need to pay lender’s mortgage insurance (LVR) if your loan is higher than 80% of the appraised value of the property. Due to the heightened risk for the lender if you borrow more than 80% your interest rate may be higher as well.
Having a home loan is a long term commitment and the maximum amount of years you can have a home loan for is 30, but you may choose to shorten the length to 10, 15 or 20 years depending upon your situation. The bigger your deposit, the lower your home loan, so it’s important to save, save, save; not only for yourself but the bank will also want to confirm your regular savings history.
Buying your home is likely to be one of the biggest purchases of your life. Call us to discuss strategies that consider your entire financial and personal requirements. It’s in your interest. DFG Wealth (03) 5976 8426.