Home loans, there’s certainly a lot to wrap your head around when it comes to borrowing money for building a new home.

Here’s a basic guide to all things mortgage and home loan related.

So what is a home loan?

Home loans or mortgages are a fundamental stage in life for many Australians as most can’t afford to purchase the price of a home upfront, if you can, well done! For the rest of us, let’s start with the basics.

With home loan repayments;

• The principal refers to the initial amount being borrowed from the lender to buy or build the home
• The interest refers to the additional cost of needing to borrow the money, consisting of applicable fees and charges

The banks want to make a good return on the money they lend you and they will offer different interest rates. Depending on your financial situation, the lender will determine exactly how much you can afford to borrow, which is something you can estimate using a home loans repayments calculator.

Fixed vs Variable

There are also two mainstream methods of home loans a borrower can decide between – a fixed rate home loan or a variable rate home loan.

Despite projections of the economy and interest rates in the future being unpredictable, a fixed or a variable home loan both have pros and cons and suit borrowers inversely for different situations.

Let’s look at fixed-rate home loans first:

• This type of home loan is where the interest rate is secured for a designated time frame.
• Fixed home loan interest rates are classified as predictive so regardless of the lender’s rates increasing or decreasing, during the period of the fixed term, the borrower will make the same home loan repayment amounts.
• This method is ideal for individuals who wish to budget with certainty such as first-time homebuyers who are adjusting to the routine of making loan repayments or investors that want constant positive cash flow in their investment properties.
• Due to the home loan being fixed, flexibility is limited as repayments do not fall if rates fall and therefore a borrower will not benefit from savings, but continue to pay their usual rate of interest.
• Now variable rate home loans:
• This type of home loan is where the interest rate will rise and fall with the market over the timeframe of the borrower’s home loan.
• Variable home loan interest rates reflect the current economic climate and therefore when the economy is doing well; the cash rate goes up and then when the economy is weakening, the cash rate often falls.
• This method is ideal for individuals looking for flexibility. Although borrowers must meet their minimum monthly repayment, there is usually an option to pay more if requested, resulting in you paying less interest over time.
  

How to avoid overpaying in 2022

Taking out a home loan is a big financial obligation for anyone. It’s best to seek professional financial advice to avoid overpaying on your mortgage. 2022 has seen plenty of news about interest rate changes with rumours of it increasing. This is not necessarily a negative, but it’s best to talk with a professional about your personal situation and goals.

• Ensuring you’re staying on top of your home loan interest rates will reinforce that you’re still getting a good deal on your mortgage – so refinancing or at least considering it is important.
• Being aware of what rates your lender and competing lenders are offering customers – there is potential to negotiate with your lender on a lower rate if others are offering better.
• Ensuring you’re not paying fees for things you aren’t using such as offset accounts that are completely empty – consider whether you’re more suited to a basic home loan or one with more attachments (and fees).
• Carefully consider your borrowing capacity and your budget for your new home. If your situation changes and you cannot make repayments, it could be a very costly process.
• Consolidate your debt – you can merge various debts into your home loan such as credit cards, personal loans or car loans in addition to your mortgage.

Now that home loans have been simplified, decide what is best suited to your needs in terms of borrowing and join the Lofty family to kick start building your home. Here at Lofty, your needs are what matter most, and we will ensure to make the entire process from start to finish a smooth one. It all starts with a conversation. Get in touch with us today.