With the multitude of brokers and lenders out there it can be confusing trying to pick the best home loan.
Understanding your finance options enables you to find the best loan for your current situation.
Getting started down the road
The first question often asked about financing is “What percentage of my purchase price do I need for a home loan?” There is no set answer to this as it changes with fluctuations in the national financial markets and the state of the local finance industry. It has been from zero to 30 per cent depending on these market variables. When organising your loan be aware that the set up fees can vary from nothing to thousands of dollars. Negotiation is often possible with these fees, so don’t just accept the first figure you are given.
Make sure you take a look at the ‘hidden’ costs such as monthly or annual fees, valuation and legal costs.
Low doc loans
If you are adverse to paperwork ‘low doc loans’ will reduce the amount of documents you have to complete, however these loans usually come with a higher interest rate. Remember that the federal and state governments offer financial incentives for first home owners, usually the only eligibility rule is that you are an Australian resident and this is your first home.
The great rate debate
Should you choose variable, fixed or split rates? A fixed rate gives your repayments a financial certainty, but because the bank is carrying the risk for this type of loan they will factor this into their quoted interest rate. A variable rate will move with the market; long-term you could win – or lose. If you want to hedge your bets a split loan may be a good alternative.
Line of credit
A line of credit loan has its advantages putting your home loan and your working cash in one account. Every cent you bank pushes your loan down and because of this your interest payments will go down as well. This type of account is only for the well-disciplined though, because if you are tempted to financially splash out your repayments could actually go up. Yeeks!
Rent-to-own loans will provide you with 100 per cent of the finance for your home; however these generally come with higher interest rates. While your new home is being built construction loans are available, these normally work off variable rates.
The more you pay the more you save
By increasing your repayment, you automatically reduce the length of your loan. However some financial institutions will penalise you if you do this by imposing an ‘early payback’ fee. Check your financier’s position on this and make sure you understand the difference between paying off the original amount you borrowed (the ‘principle’) and paying back the interest.
Make more frequent repayments
Another good tip is to make loan repayments as frequently as you can. Paying fortnightly, as opposed to monthly, will save you tens of thousands of dollars over a long-term loan. Weekly is even better! This works because each payment reduces the size of the loan and so the amount of interest payable.
The most important things to remember when deciding on a loan are:
- Shop around
- You have the power
- Everything is negotiable
- Dont settle for second best
- Develop a strategy and then see it through
If you have a questions, or would like me to write on a specific topic let me know in the comments below…
The information provided in this article is of a general nature only and in no way constitutes legal or professional advice, or specific advice in relation to any finance. In all cases we recommend you receive professional financial advice for your own personal circumstances.