Home Loans
Explained

Home Loans
Explained

The process of taking out a home loan and paying off a mortgage might seem daunting, but trust us when we say, it’s nowhere near as complex as you may think.

Once you’ve learned the basics and gained an understanding of what options are available to you, it will all start to make a lot more sense.

Luckily for you, we’ve got a great home loan starter guide for you Fremantle and Perth locals to use right here.

Types of Home Loans

There are many different lenders offering a range of home loan products. While each one will have its own features and benefits, all home loans can be classified under one or more of these categories.

• Fixed rate home loans
• Variable rate home loans
• Split home loans
• Principal and interest home loans
• Interest-only home loans
• Equity home loans

The key difference between each loan type is how interest is calculated and charged – with the exception of equity loans, which we’ll get into a bit later.

When you borrow from a bank, you’ll be approved for a certain amount to enable you to purchase your property. The funds will be lent to you under the condition you pay back the total amount within the loan term.

As a general rule, most loan terms range from 25 to 30 years. For that period, you will be charged a percentage of interest on top of the amount you have borrowed, and that’s where the different types of loans come in.

Fixed rate home loans

As the name suggests, your interest rate and loan repayments will be locked in at a set amount for a certain period of time, usually between 1-5 years. When that period expires, your loan will likely switch to a variable rate. At that time, you could get a mortgage broker to see if they can negotiate another fixed deal for you, if that’s going to work in your favour.

Fixed rate home loans can give you peace of mind because you’ll know exactly how much you’ll need to pay during the fixed term. If interest rates go up, it won’t have any impact on your repayments, but the same applies if interest rates go down. It can be tricky to break a fixed loan and switch to a different product (e.g., if you want to refinance) and you may not have access to as many loan features, but we’ll get to that in a moment.

Variable rate home loans

Essentially the opposite of a fixed loan, the interest rate on a variable home loan can go up or down at any time during your loan term. It all depends on what happens in the market, what the Reserve Bank of Australia (RBA) decides to do with the cash rate, and how your lender responds.

As you’re open to fluctuations in your repayments, variable loans tend to come with additional perks to help sweeten the deal. From more flexibility in your repayments and refinancing options, to accessing those extra loan features we’ve touched on, there are benefits to having a variable loan. It all depends on what’s going to work best in your situation.

Split home loans

To get the best of both worlds, you can actually split your home loan. With a split loan, a portion will be set at a fixed rate and the remainder will be put on a variable rate. Depending on your lender, you may be able to decide exactly how your loan is split up.

Principal and interest versus interest-only

No matter whether your interest rate is fixed, variable or split, you could have a principal and interest, or an interest-only home loan set up.

On principal and interest, you’ll need to pay off the amount you’ve borrowed (the principal), plus the interest on that amount. Interest-only, on the other hand, only requires you to pay the interest charges. While it lowers your repayments in the short term, it does mean you’ll likely be paying more in the longer term. You’ll only be able to stay on an interest-only loan for a set term before reverting to principal and interest.

Equity home loans

Unlike the other types of loans, equity loans can only come into play when you have an existing mortgage. With this type of loan, you are borrowing against the equity in your home. In more simple terms, it means you have the chance to access funds you’ve previously put towards your mortgage. You can then use that money for other purposes, including renovations or purchasing an additional property.

GET STARTED WITH
LOAN MONSTER

Are you looking to refinance? Want to buy your very first home? Need an investment property loan? We can take care of it all for you at Loan Monster. Get in touch with our team and let’s get started today.

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Crunching the Numbers
For Your Home Loan

When deciding to take out a home loan, one of the first things you need to do is find out what you can afford. You could try using an online calculator to figure out how much you can borrow, but it’s always best to chat with a professional.

Online calculators make a lot of generalisations to try and give you a rough estimate, whereas a mortgage broker will take your finances and your personal situation into account to provide you with a far more accurate answer. Once you know your borrowing capacity, you can start to get a feel for your upfront and ongoing costs.

Home loan deposit

To apply for a home loan, you’ll need to put forward a deposit. There are low deposit home loan options available, but as a general rule, most lenders will require a minimum of 5% of the total amount you’re borrowing.

If you’re contributing 20% or less, you will likely need to pay Lender’s Mortgage Insurance (LMI). Your insurance will protect your lender in case you’re unable to pay back your loan. If you’re a first home buyer, there are government grants available to help make purchasing property more affordable.

Fees and charges

It’s important to remember that there’s more to consider in your budget than just your regular repayments. There are also a range of fees and charges that you may need to pay over the course of your loan, including some of the following –

• Application fees
• Account keeping fees
• Annual fees
• Redraw fees

Depending on the property you purchase and whether government grants apply, you may also need to pay stamp duty, conveyancing fees, title fees and more. There’s also mortgage protection insurance to consider, which will cover you should certain circumstances prevent you from keeping up with your repayments.

Budgeting for your mortgage

As you can see, there are a lot of different costs to budget for when taking on a mortgage, and what you need to pay can vary a lot depending on your situation. It may seem overwhelming, but once you sit down with a mortgage broker and settle on a loan product, you’ll be able to get a clearer idea of what will apply to you.

The Fun Features of Home Loans

Now that we’ve gone through the potential costs you’ll need to cover, we can take a look at some of the fun features that are offered on certain loan products.

Offset accounts

If you want to try and lower your repayments or pay off your mortgage faster without every spare dollar going to your home loan, an offset account could be an option for you.

By keeping the bulk of your savings in your offset account, you will quite literally offset the amount of interest you’re being charged. Your home loan will take the balance of your offset account and subtract that amount from the total you’ve borrowed.

So, if you have a home loan for $550,000 and you have $25,000 sitting in your offset account, you’ll only be charged interest on $525,000.

At the same time, you can still readily access the funds in your offset account like a regular savings account, providing you with flexibility. Even though you may not be earning interest on your savings, you will likely still be saving in the long run.

Redraw facilities

If you have a home loan with a redraw facility, you can withdraw funds from your home loan when you have made extra repayments. You will get to enjoy similar benefits to an offset account, as a redraw facility can potentially lower your repayments or help you pay off your mortgage faster.

A redraw facility may be a better option for you if you are often tempted to spend your savings. Instead, you can put them directly onto your home loan with the option to access those funds should you need them for an important reason.

Getting Pre-approval
On Your Home Loan

Of course, the most exciting part of the entire process is the actual house hunting, but before you start heading to home opens, it’s best to get pre-approval first. If you go to a mortgage broker, they can calculate your borrowing capacity and recommend a range of loan products that will work for you and your situation.

Once you choose a particular product, your mortgage broker can submit you for pre-approval. You can then go to a builder or put in an offer on a property that’s subject to finance with the knowledge you’ve already been given the greenlight by your lender. It’s basically the equivalent of having all your ducks in a row, giving you a much better chance for success when you find a home you love.

How to Get Started on Your Home Buying Journey

One of the easiest ways to get started is to sit down with a mortgage broker and have a chat about your situation. While you can go to a bank, they’re only going to offer you a limited number of options within their loan product range. A mortgage broker will consider multiple lenders and hundreds of products to find the most suitable options for you.

At Loan Monster, we’ll break everything down to help you understand how it all works. When you come to us, you can sit back and relax while we do all the hard work for you. If you want to catch up with us to see how we can help, get in touch with our team today. We’ll get back to you within 24 hours, even on weekends.

GET STARTED WITH
LOAN MONSTER

Are you looking to refinance? Want to buy your very first home? Need an investment property loan? We can take care of it all for you at Loan Monster. Get in touch with our team and let’s get started today.

Get started today