Home loans are an important part of buying a house. Some people might even say that getting the right home loan is even more important than getting the right property! Unless you are one of the tiny proportion of people who can afford to buy a house outright, you are going to need a home loan so it is well worth investigating how they work to make sure you get the best deal. In this article we will discuss the basic mechanics of a home loan so that you are informed when deciding which lender to take one from.
What is a Home Loan?
A home loan is an agreement between you and a financial institution that is loaning you a sum of money to purchase a property. Say for example you want to purchase a house which is $700,000 but you only have half of that amount available to spend on a house, you can organise a home loan to cover the extra $350,000. The lender then organises a repayment plan so that you can pay them back for that loan, including interest. In practice this means you will end up paying the lender more than the principle, although how much more depends upon many factors.
Investigate Your Options Thoroughly
Buying a house is one of the largest investments you may ever make, so do it carefully. Investigate all of the options available to you, including specialist mortgage lenders, credit unions and banks. There is no silver bullet home loan that is going to be perfect for everyone, and remember that the people offering to lend you money are going to make money from the transaction in the long run so they may not necessarily have your best interests at heart when it comes to defining the terms of the loan. Make sure you gather fact sheets from the different lenders you speak to so that you can confirm the loans carefully.
Interest only versus Principle and Interest Home Loans
A principle and interest home loan means that your structured payments work to reduce the size of the outstanding loan, the principle, and also pay off the interest on that principle. This means that if you make all of the structured payments over the duration of the loan it will be entirely repaid. An interest only loan arrangement means that your structured payments only account for the interest on the principle you borrowed in the first place, and extra payments need to be made to reduce the size of the principle. However, interest only may work in your advantage if your financial situation doesn’t allow room for you to pay off principle just yet.
Offset Account and Redraw Facility
An offset account is a savings account that is tied into your home loan account. The balance of your offset account acts to reduce the size of the principle and therefore reduce the price of repayments. However an offset account will only save you money if it remains at a particular level and if it drops too low you will likely incur extra fees.
A redraw facility is a stipulation of a home loan agreement that lets you pay extra into the loan and then withdraw it again later on. An example might be having your entire pay put into the loan and then paying bills or withdrawing money from the loan.
Portability is important if you are likely to move house before the home loan is repaid. It means you can transfer your home loan from one property to another, although just like an offset account and a redraw facility, extra features can mean a more expensive loan and higher fees.