How do you get the best loan for you? A shockingly low number of 4% of Australian’s with mortgages refinanced last year. Does this mean that 96% of us are happy paying more for our mortgage? I don’t know about you, but I would much prefer to have a few extra bucks in my pocket then feeding the banks ever growing profits.
So, what can you do about this and what home loan is going to best suit you?
It can be hard to know where to start when establishing or reviewing your loan so below are a few handy hints to get you started.
Step 1: Is your loan for your home or is it for an investment property?
This is when the lending with your bank is used to buy or refinance the house you live in; the finance term is that it is an owner-occupied loan. Banks love home loans, they are more willing to lend for the purchase of your home then for investing in property.
A loan that is used to purchase or refinance an investment property. The sole objective for an investment loan is to invest for capital growth and/or income. Recently lending conditions have made rates and lending harder to get for investment loans thus making rates and conditions to investment lending harder then owner occupied loans.
Step 2: What type of repayments are you making?
This is when you are paying the interest of the loan to the lender and not paying down the ‘principal’ of the loan, therefore the outstanding balance will not reduce. The interest only period will be for a set timeframe, generally between 1 and 5 years. After this time your loan will automatically revert to Principal and Interest repayments.
When to consider: If you are on a tight budget but primarily used for investment properties to assist with tax deductibility.
Principal and Interest (P & I)
P & I means you are putting funds into your mortgage to reduce the balance of your loan on top of the interest repayments. Lenders are much more favourable to P & I repayments as it reduces risk to them as your loan balance is shrinking thus interest rates are generally lower. However, your repayments each fortnight are going to be higher as you are reducing your outstanding debt.
When to consider: Always great to aim to have your home paid off before retirement so if this is a family asset usually P & I is the way to go.
Step 3: Fixed rates vs variable rates
A fixed rate means your interest rate and repayment amount is locked in or ‘fixed’ for a set time period. This time frame generally ranges from 1-5 years. You are unable to change you loan provider or repayment type (without incurring significant penalties). There are also limitations to the amount of additional funds you can pay off your loan, so be sure to check with your lender.
When to consider: Can be great for when you have tight cashflow or are concerned about interest rates rising.
Are more flexible as you have the ability to pay additional funds into your loan, you can change your repayment type from P & I to interest only of vice versa, you can refinance your loan with another lender and you can use an offset or redraw facility.
When to consider: If you think we are going to experience interest rate reductions or want flexibility to move lenders and make additional payments off your home loan.
Step 4: Helpful tips
Set up your banking structure around your home loan to help reduce your interest payable by having an offset account or even better, multiple offset accounts. Not all lenders will allow this so ensure you research this or use a great Mortgage Adviser to assist.
Be careful with introduction rates. It is common to see a great 1 or 2 year introduction rate but after this period has finished the interest rate will revert back to the lenders standard variable rate which can be rather average. It can be great to take advantage of these rates but be open to changing lenders after the introduction rate finishes if it means getting a better deal.
Initial one-off payments or benefits are common as a way to lure you into using a particular lender. This can be an added bonus but be sure that it is not the only reason to use a lender.
Understanding the lingo and what structures are available is a great place to start the process of finding the best loan for you but when it comes down to what is the best for your seeking advice from a Financial Adviser and Mortgage Adviser will ensure a streamlined approach to getting the loan that suits your needs. You can book a time here to chat: www.pursuewealth.com.au/chat