Mortgage loans: considerations
Entering into a mortgage loan is one of the biggest financial decisions you can make. Therefore it is important that you know your own circumstances as well as what is out there.
There are so many different types of mortgage loans out there that cater to different needs and circumstances. For example, there are loans that cater for risk appetite, loans that cater for different property types (that is, construction properties versus developed property), as well as loans that cater for borrower financial capacity just to name a few. The aim of this article is to give insight into the spectrum of loans that are out there.
Want to know how to get the best mortgage rate? Refer to our previous segment on ‘Securing the best mortgage rate - things you should know’.
Variable Rate loans
This is one of the most common loans that are used. With variable rate loans, the interest rate is set to imitate the RBA cash rate. As such, this loan is perceived to be riskier.
There are two types of variable rate loans: standard and basic. With the standard loan, the interest rate is higher relative to the basic. However, it has features that are quite desirable such as the ability to make extra repayments as well as the use of the redraw facility and offset accounts. Furthermore, refinancing can be done with ease and with no cost.
With the basic variable rate loans, rates are lower, although lacks the features described above.
Fixed Rate Loans
Fix rate loans lock in your interest rate for 1 to 5 years generally at a rate above the current variable rate. With this loan, you would be hedged from the risk of interest rate rising. However, drops in interest rates won’t apply to you.
This type of loan is suitable for individuals with a conservative risk appetite and who prefer to be able to plan their own budget. There are however some disadvantages to this type of loan. Like the basic variable loan, you will not or have limited/restrictive access to desirable mortgage features such as being able to make extra repayments to save interest or having access to the redraw facility or offset accounts. Furthermore, once you have signed up for a fixed rate mortgage, it is rather costly to switch loans during the fixed term period.
Interest only loans
Interest only loans typically have higher rates than principal-interest loans due to the ease that it provides to the borrower. For the duration of the interest only period (this could typically be anything between 1-5 years), the borrower does not have to pay any of the principal but only the interest.
This is very suitable for investors who are wagering on house price increases and who are planning to sell in the short term. It is just as suitable for the financially strained, young homeowner who does not have much money at the moment but are expecting a higher income in the near future.
If you do wish to borrow more than 80% of the purchase price but don’t want to pay for mortgage insurance, you can consider guarantor loans. Guarantor loans involve using someone else’s (depending on the lender in most instances, this will have to be a relative) property as a security blanket for your loan. If you wish to undertake this loan, it is important that you have proper discussion with your guarantor and any relevant bodies as their property will be seized by the banks in the event of your default.
Line of Credit Loans
Line of credit loans are flexible loans which allow you to draw down and repay sums at any time up to the approved limit. These loans have no agreed term. Repayments are also interest-only, based on the amount you have drawn down at the time.
A line of credit mortgage is a good way to borrow money for investments, wealth creation as well as for renovations
For those of you who are looking to construct their own property, you could also consider construction loans. This loan is unique in that it is not a single loan, but rather, a series of loans. Such loans are given out in installments at each stage of construction. For example, after paying the deposit for the land, you can draw down on the loan when the slab is laid, when the main housing frame is finished, when the brickwork is laid, etc.
With this type of loan, the money is not given to you upfront. Rather, it is paid straight to the builder.
Honeymoon rate mortgage
Honeymoon rate mortgages offer introductory rates that are below the current variable rate. This introductory rate usually lasts between 6-12 months after which it will revert back to the standard variable rate. Such a mortgage is beneficial in that it gives borrowers a chance to ease into their mortgage. Furthermore, borrowers could also use this time to make extra repayments so that they are in a better position when their mortgage reverts back to normal,
There are, however, cons to this type of loan. The main disadvantage is that when the mortgage reverts, you may be stuck with a rate that is not competitive. Furthermore, with this type of loan, refinancing will be costly.
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