A home loan is something to take seriously – after all, it’s one of the biggest financial commitments of your life. So how do you find a home loan that’s right for you?
Here’s how you can determine whether a loan is suitable for you, as well as hints and tips on home loans for first home buyers.
There is a lot to look into when you’re looking for a home loan, but one of the most important factors to take into consideration is the interest rate. After all, a home loan is a form of very long-term debt, so the interest – which determines the rates of repayment – can add up over time, depending on how long it takes for you to repay your mortgage.
The Two Types Of Loans
When it comes to home loans, most people will take out a principal and interest loan. With this kind of loan, you make regular repayments on the amount borrowed – the principal – plus interest. The life of these loans is usually between 25 and 30 years, so it’s a big debt to take on, but still manageable if you’re smart with your money.
Need some help learning how to manage your mortgage? Check out our article to find out how you can ease the burden of mortgage repayments.
Then there’s interest only loans. For an initial period, your repayments only cover the interest on the final amount borrowed. This period is usually the first 5 years of the loan. In essence, since you aren’t paying off the amount borrowed and only the interest, your repayments will be lower during the interest-only period. After this, however, you’ll begin repaying both the principal and interest, so make sure you’re prepared for this.
Essentially, you’ll want to find a loan with the lowest possible interest. Even if you can get a mortgage with an interest rate just 0.5% lower, the savings will really add up over time.
Fixed Interest Rate
Aside from the interest rate, you’ll also need to weigh up the pros and cons of a fixed versus a variable interest rate. A fixed interest rate means that, for a set period of time, your interest rate remains the same no matter what’s going on in the market. After a determined period of time has passed, you can switch to a variable interest rate or renegotiate another fixed rate.
Fixed interest rates are a good idea if you want a clear idea of your budget, but there is a downside: if interest rates go down, you won’t be able to take advantage of this.
Variable Interest Rate
A variable interest rate moves with market trends, for example when the official cash rate changes. These loans are sometimes great, as it means you can take advantage of unexpected low interest rates – on the other hand, however, you’ll also have to endure interest rate hikes that will affect your repayments.
If you’re unsure which is best for you, you can consider a split mortgage. A split rate home loan allows you to split your home loan into multiple accounts with different interest rates. For example, you could split your loan in two, with one part being fixed interest and the other half being variable interest.
Consider The Life Of The Loan
On top of interest rates, you’ll also need to look at selecting a loan with the shortest term that you can afford. Your loan term will not only define how long you have to pay off the loan, but it also impacts the size of your mortgage repayments and, in turn, how much interest you will end up paying over time.
The reasoning behind this is quite simple: a shorter loan term means higher repayments, but because you’re paying the loan off faster, you’ll pay less interest. A longer loan term (around 30 years) means lower repayments, but because you’re spending those extra years making repayments, you’re also paying a considerable amount in intertest.
Home Loans For First Home Buyers
Unfortunately, there’s no such thing as home loans exclusively for first home buyers. However, there are some special grants that you can take advance of, such as low deposit home loans and 5% deposit home loans. These fall under the First Home Loan Deposit Scheme, in which you will be required to have 5% down payment, and the government will chip in the remaining 15%. By having 20% of your home loan ready, you’ll avoid expensive mortgage lender’s fees. However, the scheme is not guaranteed for everybody – it’s estimated that 1 in every 10 applicants will be accepted.
Other things worth looking at when comparing loans include:
Application fees (where applicable)
We hope all this makes home loan-hunting a little easier for you. If you’d like to do a little more reading, why not check out all of the government grants available to first home owners in Queensland?