Choosing Your Home Loan
Tips to help decide which home loan is best for your needs
Choosing a Home Loan
So you’ve decided to buy a property – congratulations! ASIC MoneySmart has some great tips on buying a home, including videos and tips. View them here.
The next step is deciding which home loan is best for your needs. We've put together a list of things to consider to help you make informed decisions.
How to Choose a Home Loan
The process of choosing a home loan can seem overwhelming, but it doesn’t need to be. To make it easier for you, we’ve put together some questions for you to consider to establish your needs and learn about the features and costs associated with home loans.
What do I need in a home loan?
This will depend on the purpose of your loan. Are you going to live in the property or are you buying the property as an investment? The difference between the two is negligible, but it might affect how you restructure your repayments or may have tax implications. If you are not sure, it may be a good idea to speak to your Accountant.
Interest Only or Principal and Interest Repayments?
If you are purchasing a home to live in, you will likely want to make repayments to cover the interest, as well as some of the principal. Interest only loans are popular with some investors as they allow you to minimise your mortgage repayments in the short term, while your property hopefully grows in value in the long term. The immediate benefit is saving on monthly mortgage repayments, however you will not make any headway on your mortgage, or gain equity through paying down the principal amount you borrowed, if you choose interest only repayments. Property investors may choose to take this risk as an increase in property value will increase equity without paying anything off the principal.
There are many things to consider when choosing how to structure your repayments, we can help answer your questions so you can make an informed decision.
Fixed vs Variable?
Choosing a fixed or variable rate loan can be difficult, particularly in the current low interest rate environment. Do you choose variable and let market forces decide your rate? (When rates go up so does your mortgage rate, conversely when they go down so does your mortgage rate). A fixed rate loan means your rate will stay the same no matter what happens in the market, which is great if rates rise, but not so great if they fall.
We provide the option of splitting your home loan into both fixed and variable interest rates. Then no matter what happens in the marketplace only part of your home loan is affected, for the better or for the worse.
Redraw vs Offset?
Redraw facilities and offset accounts are two home loan features that allow you to use any extra income or savings to reduce the balance of your home loan, thereby reducing your interest repayments. There are many similarities between the two, but they operate in slightly different ways.
A redraw facility enables you to deposit any spare income you have directly into your home loan therefore reducing the amount of interest you pay. You can then redraw advance funds from the loan at any time.
An offset facility enable you to deposit funds into a nominate savings account, with the balance of those funds reducing the amount of interest you pay on your home loan.
In terms of interest savings, a redraw facility has much the same effect as a 100% offset account in that funds in the loan lower the amount you are paying interest on.
If we take the example of a $100,000 loan with a redraw facility with $10,000, interest would be charged on $90,000. Much the same, a 100% offset account with $10,000 will reduce the amount interest is charged on $90,000.
The main difference between redraw and offset accounts at Southern Cross Credit Union is that redraws (excluding Five Star Plus Home Loan packages) are charged at $25.00 per transaction, whereas access to the 100% offset account is free. A decision on which option to take will very much depends on your spending and saving patterns. We’ll help you consider your options to make the decision that is best for your situation.
What is Loan to Value Ratio?
The Loan to Value Ratio (LVR) is simply the amount of your home loan divided by the property value. For example, to borrow $400,000 to buy a property that costs $500,000 would equate to an LVR of 80%.
Loan to Value Ratios can have an impact on how your mortgage is structured; make sure you ask your Home Loan Specialist about LVR at your home loan appointment.
Buy now or save more?
We can help you decide whether you should buy now or wait until you have saved a larger deposit. Our Home Loan Specialists can run through an in-principle approval and provide you with an estimate of how much you can borrow, including an estimate for Lenders Mortgage Insurance (if needed).
We hope this information has helped you understand some of the terminology that is used when selecting a home loan. If you would like to know more, or are thinking about refinancing or switching your loan, our Home Loan Specialists can answer all your questions to help you decide on the home loan that will best suit your needs. Call us on 1300 360 744 to make an appointment.