A home loan, also referred to as a mortgage is a loan made available to you through a financial institution. The property that you buy is used as security against the loan. In Australia, a home loan is typically borrowed over a 25 or 30 year period, payments are made bi-monthly or monthly to pay the loan off by the end of the agreed contract. If you are unable to maintain payments on the loan, the last resort will be that the property is sold to settle the debt. Interest rates on the loan will vary depending upon lender and the most important factor, your credit score.
It is essential to invest time in searching for the best loan that suits your current financial situation.
Your Credit Score
Having a good credit score is something that everyone should aim for. There are several reasons why it is important to have a good credit rating. The main reason is that it will enable you to secure credit. There are two main types of credit providers: conforming and non-conforming.
A major bank or lender is considered to be a conforming credit provider. They require the applicant to have good credit before granting finance. There are several advantages to securing finance through a conforming lender and these include low fees and interest rates.
A non-conforming lender is one who specialises in providing credit for those with a bad credit history. Although it is possible for people with bad credit to secure credit, one of the major disadvantages is that interest rates and fees are exceptionally high.
If you are looking for a low interest home loan it is essential that you have a good credit rating prior to making an application. Once you are confident that you will qualify for a loan, there are a range of home loans that you can choose from.
A fixed rate loan
A fixed rate loan means that the interest rate is fixed for a certain period of time. This is typically between 1 and 5 years. Interest rates will vary between financial institutions; therefore make sure that you spent time to compare home loans before agreeing to that.
One of the major advantages of a fixed rate loan is that there are no surprises at the end of each month; your repayment amount will not change during that period.
The major disadvantage of a fixed rate loan is that it is inflexible. If you want to sell the property prior to the end of the fixed term, you may be subject to an early termination fee.
A variable rate home loan means that the interest rate is subject to change over the lifespan of the loan. The change in interest rate may be due to a business decision made by your financial institution, or in response to official cash rate movements.
One of the main advantages of a variable rate loan is that it is flexible. If you want to pay more on the loan each month, you generally can, and there isn’t usually a penalty charged if you decide to sell your property before the end of the term agreement.
A Split Loan
This is a combination mortgage where a part of it is on a variable rate and the other part is on a fixed rate. If you are not sure how long you intend to stay in the property, a split loan is a viable option as it provides the borrower with both security and flexibility.
An interest only loan allows the borrower to make repayments on the interest only as opposed to the interest and the principal. This is a good loan for investors, who claim a tax deduction on interest payments, it is also good for those who would rather pay lump sums off their principal to get ahead on their repayments and their loan. An interest only loan is not advisable if you are looking for a low interest home loans rate because the less principal that is paid back, the more interest is paid over the years.
An interest only loan is only available for a short period of time, typically 1-5 years before it reverts to an interest and principal loan.
A line of credit
This is a loan that is borrowed against the equity of your home. It provides you with the ability and the flexibility to access the loan when you need it. This is a loan that is set up against a home that you already own. It basically allows you to pay back what you have put in.
There are low interest home loans available to all those who qualify. However, it is essential that you invest time in searching for the best loan that is suitable for your current financial situation. If you are uncertain about which what loan is best for you, seek financial advice before making a decision.