Understanding Home Loans
Home loans in Australia can be broadly broken into two separate categories - Principal & Interest Loans and Interest Only Loans. The primary difference between these two home loan types is a Principal & Interest structure is designed to be paid down within a set time period while an Interest Only is not.
All home loans incur interest. The amount of interest payable on each repayment is determined by the interest rate. You can either have a fixed interest rate, a variable interest rate or a split rate whereby a portion of debt is fixed and a portion is variable.
Furthermore, there are add-ons like Offset accounts or Redraw facilities designed to either help you pay down your loan faster using your day-to-day transaction accounts and/or allow you to make additional repayments that you can draw on in the future.
Most lenders will offer a combination of some or all of the above and market these different combinations using different brand names with different fees and charges.
For instance you could have a Principal & Interest Loan with a variable interest rate and an offset with a $400 annual fee. Alternately, you could also choose an Interest Only loan with 70% of the loan amount variable and 30% fixed for 5 years with a redraw facility that allows you to draw on the principal repayments with no fees.
Working out what is the most suitable loan for you can take a lot of time, effort and research. Let Wealth Partners conduct a professional analysis for you to work out which lending product, or combination of products, is best for you.
Principal and Interest
Principal & Interest (P&I) loans are Term Based Loans, meaning that with each repayment made, a portion of the principal (the amount that was originally borrowed) is reduced.
P&I loans are by far the most prevalent loan types for owner occupiers in Australia. They generally offer the lowest interest rates and are considered easy to manage, with the borrower only needing to make the scheduled repayment each week, month or fortnight in order to pay down the loan in scheduled time period.
The downside to P&I loans is that they are usually designed to be paid down over extremely long periods of time and as such can work out to be very expensive to the borrower unless they have sound strategies to reduce the balance over and above the minimum payments.
Contact us to find out what is the best strategy for you to pay down your existing home loan faster.
An Interest Only loan does not have a loan term and therefore the only required payment is that of the interest component. Any additional repayments over and above the interest component are deducted from the loan amount.
Interest Only loans are often favoured by investors who might not have a vested interest in paying down their investment loan. It is also popular with people who want flexibility in their repayments.
When managed correctly, Interest Only loans can be used to aggressively pay down owner occupier debt. Contact us to find out more about Rapid Debt Reduction strategies.
The advertised interest rate on a home loan is an annual rate that is charged at each repayment interval. Each percent of an interest rate equates to $1,000 each year for each $100,000 that you owe.
There are many factors that determine a bank's interest rate, including the cash rate set by the Reserve Bank of Australia (RBA). The RBA meet on the first Tuesday each month to review and set the cash rate. Other factors include lending costs and, most importantly to the customer, a bank's willingness to discount in order to attract new business. Many lenders will accept "Pricing Requests" from Mortgage Brokers who can negotiate a lower rate than what is being advertised by the lender.
Contact us and we'll do our best to negotiate the sharpest, most competitive deal for you either with your existing lender or a new lender.
Fixed and Variable
Most lenders offer a choice of either a Fixed or a Variable interest rate or a combination of both.
A variable interest rate will fluctuate up and down with the cash rate.
A Fixed rate allows the borrower to lock in and secure an interest rate in the belief that the bank is likely to raise the interest in the future. Locking in a fixed rate is often seen as a good option for clients who like certainty of their financial obligations moving forward. The obvious downside is that if interest rates go down, a client who has fixed their rate is obliged to continue making the higher repayment.
A client can usually opt to have a portion fixed and a portion variable.
Account Keeping Fees
and Comparison Rates
Many lenders will charge clients a fee for having a mortgage with them. These fees are paid over and above the interest repayments. Some lenders charge fees annually, some each month and some not at all. Some lenders are able to offer a seemingly heavily reduced interest rate but will offset any savings a client might make by incorporating a hefty Account Keeping Fee. To make it easier for consumers to make an informed decision about interest rates, banks are required to advertise a Comparison Rate. A Comparison Rate is the amount in money that would be paid represented by an interest rate if the loan was valued at $150,000 and the loan term was 25 years.
Given that your home loan in unlikely to be exactly $150,000 on a 25 year loan term, Wealth Partners Australia is happy to provide you with an exact comparison where you can see exactly how much a loan will cost you in interest fees and charges over its scheduled life cycle.
Contact us to find out the exact comparision for you.
Offsets, Redraw Facilities
and other Linked Accounts
Many lenders offer ways to either link a savings, credit card or other transaction account to your home loan in order to offset the balance of your home loan using your income or savings. Theoretically, if you had a loan where you owed $150,000 and you had $100,000 of your savings in a linked Offset account, you would only be charged interest on $50,000. While this example is extreme, many clients use offset accounts to have their income deposited into so that they can reduce their interest liabilities.
Setting up and maximizing how to best utilize these facilities to get the most out of your home loan is what we pride ourselves on.
Book an appointment with us so that we can calculate potential savings for you.
Loans for different situations
Some customers don't qualify for traditional home loans because they are self-employed and do not get paid via a tax file number and a bank can't verify their income.
Other customers might have poor credit history due to a variety of reasons and the major lenders are unwilling to extend them credit as they feel the risk is too great.
There are options available in these situations using either Low-Doc loans or a product from non-conforming lenders.