Making smarter home loan choices: here’s how.
Making big decisions around mortgages isn’t something you do every day. We’ve prepared some food for thought on loan features.
Interest rates matter, but there’s more to a loan than its interest rate.
With many lenders competing for your business, it’s easy to get swayed by heavily marketed home loan interest rates! Interest rates matter, but over the long-term, interest rates fall AND rise. Before choosing a loan, make sure you have ‘wriggle room’ so you’re able to meet repayments if rates rise by several percentage points.
Of course, you can always opt for a variable interest rate loan (with rates that go up or down) or a fixed rate loan that gives you repayment certainty for a set period. You may decide to ‘split’ your loan.
Do you want to make extra repayments?
Paying above and beyond your minimum monthly mortgage requirements, without penalty, can help you longer term, reducing your loan interest. It can also help you pay off your loan sooner. Keep in mind that some loan types (such as fixed rate loans) attract major fees and penalties if you pay them out early.
Do you need a loan with redraw facilities?
From time to time you need to tap into extra money you’ve stashed away in your home loan. Being able to redraw those extra payments for ‘rainy days’, without being lugged with fees or charges, could give you real peace of mind. Of course, it’s not something you’d want to do too often, or you may risk missing out on loan interest savings.
Principal and interest vs. interest only?
Deciding between principal and interest home loans and interest-only loans? A P&I loan requires you to make regular payments against the principal (what you’ve borrowed) as well as pay interest. This type of loan is designed to be repaid in full over the life of the loan (typically 25 or 30 years).
With an interest only loan, your repayments only cover the loan interest. The principal amount you borrowed won’t reduce unless you make additional repayments. Interest only loans are usually for a set period (e.g. 5 years) and they generally revert back to P&I once the interest-only term ends.
What’s a honeymoon rate?
A honeymoon rate refers to the discounted home loan interest rate offered on some variable rate loans for a set period at the start of a loan. The ‘honeymoon’ typically goes for months, but sometimes it may be offered for several years. Once the honeymoon period’s up, the loan reverts to a standard rate that’s usually higher.
Honeymoon rates: the benefits to borrowers
Honeymoon rates make easing into the home loan repayment cycle that little bit easier. They take the edge off repayments. Savvy borrowers sometimes use the honeymoon period to make additional repayments and get ahead of their loan repayments, effectively building a repayment buffer.
Are there any ‘red flags’ to be aware of?
If you’re signing on for a home loan with a honeymoon rate, you must do so with your eyes wide open – making sure you can comfortably meet the loan repayments when the honeymoon period ends. When the loan reverts back to the everyday home loan interest rate, you need to make sure your bank balance is braced for the change, too. It’s also worth noting whether the interest rate you’ll be paying when the rate reverts back to the standard rate will be competitive.
When you’re making any kind of major financial commitment, be fully aware of the ongoing or one-off fees and charges costs associated with the loan. Ensure the features are matched with your financial goals. If this article raises more questions than answers for you, and you want to know more, make an appointment with us.
Looking to speak to someone about finding loan features and loan types that make the right ‘fit’ for you?
Contact DFS on 02 9114 6663 at your earliest convenience.