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.