When you are applying for Australian home loans it is very important to do your research. You must find the right loan with the right provider so you can be sure that you are getting the best home loan for you.
The interest rates that are offered with home loans will greatly affect how much you will pay on the loan. A major part of finding the best home loan is finding the best home loan rate. This article will explain the various types of home loan options available in Australia and how you can find the best home loan rate to save you money by reducing your interest repayments.
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What home loan rates are available
When you are applying for a home loan it is essential that you know what type of home loan rate you would like. This section will explain what home loan rates are available. The home loan rates are:
Fixed: Locking in your interest rate
The fixed rate home loans are offered by most providers and allow you to lock in an interest rate from when you sign up until the agreed upon date. The interest rate offered with fixed rate home loans are usually slightly higher than the variable rates but if the interest rates rise the rate you have will be lower than the variable rate.
Variable: Floating and adjustable
Variable interest rates are when the interest rate and therefore your repayments, will change over time. If the interest rates are lowered your repayments will drop but if they are raised so will your repayments. These loans will generally come with a lot of features.
Split: Both fixed and variable
If you cannot choose between the fixed and variable interest rates you can always split the loan. By splitting the loan you can subject part of your loan to a fixed rate and the other part to a variable rate. That means while you will receive the fluctuations in repayments with the variable rate they will not be as severe.
How to find the best home loan rates
Choosing the type of interest rate you want is one part of deciding which on a home loan. It would ideal for you to find the best provider who offers you the best loan package which will include the best rate for you. This section will explain how you can find the best home loan rate:
What is the best home loan rate?
The best home loan rate can be the best interest rate that you can get on a home loan. But beware, although the home loan has the best rate you may be charged surplus amounts of money in other expenses of the loan. So after you consider this, the best home loan rate for you to consider may also be a loan with a low interest rate and minimal additional costs.
When you are considering a home loan you must decide whether you are suited to a fixed or a variable interest rate. Each of the rates comes with their own advantages and disadvantages. This article will explain what each of the loans are, what features they offer and who is suited to them.
Variable interest rates
Variable interest rate loans are very popular in Australia. This section will explain what variable rate loans are and what features are offered with the loans. These are:
The interest rate that is offered with the variable rate loans will fluctuate over time. If the reserve bank raises or lowers the interest rate the providers will have the option of following. If you compare the interest rate offered by all the loans the variable interest rate will be the lowest rate offered at the time.
Features associated with the variable interest rate:
The main benefit of the variable interest rate is that the loans will have a variety of features. The loan can offer features such as interest offset accounts, the ability to make free additional repayments, the ability to make free withdrawals and many more.
Who is suited to a variable interest rate:
The variable interest rate loans are suited to people who would like to take advantages of the highs and lows. Since the interest rate fluctuates people who are on the variable interest rate loan will experience increases in their payments when interest rates rise, and decreases in repayments when interest rates fall.
Fixed interest rates
Fixed interest rate loans are offered by most providers. This section will explain what fixed rate loans are and what features are offered with the loans. These are:
The fixed rate loans offer you an interest rate that is above the variable rate. The fixed interest rate that is offered at the time of the loan will generally be around 0.5%p.a above that of the variable rate. However, if the interest rates get raised throughout the term of the loan your repayments will not change. If you fix at the right time you can end up saving a lot of money that may have been paid out on interest.
Features associated with the fixed interest rate:
The fixed interest rate loans generally have few features. Some providers may offer loans with extra features but you will have to check the provider’s website to confirm. Although the fixed rate loans are generally less flexible they offer you stability. By knowing what your repayments are going to be you are able to budget accordingly and not be disadvantaged when the interest rates rise.
Who is suited to a fixed interest rate:
The fixed interest rate is handy of you would like to fix the interest rate so you don’t have to worry about paying more onto your loan. These loans are suited to the people that would like some stability in their repayments. Furthermore, the fixed rate loans would be suited to people who are working on a budget and don’t have too much disposable income. The fixed rate loans will ensure that you will not be paying any extra and that you will be able to afford your repayments.
When to fix your home loan rate
When choosing a home loan it is very important that you get the right home loan. Each person will have different needs when they are paying off their home loans so it is very important to get the right one.
Some people may want to get a fixed rate home loan. By fixing the interest rate on a home loan you will potentially save money if the interest rates rise. This article will explain whether you should fix or whether you should not fix by giving both sides of the argument.
Why should you fix
If you want to fix your home loan there can be many benefits. This section of the article will explain all the reasons that support fixing the interest rate:
One of the main reasons people will fix their home loans is for the stability. When you fix the interest rates you will know what your repayments will be and will know that they will not change during the fixed rate period.
Chance to save:
The fixed interest rate loans also give the borrower a chance to save. If the interest rates rise dramatically during the fixed rate period you may be able to save a lot of money compared to choosing a variable rate loan.
Why not fix
If you want to fix a home loan you should be aware of the disadvantages of fixing. This section of the article will explain all the reasons why you shouldn’t fix:
Most of the fixed rate loans come with little flexibility. You will usually not be able to pay extra onto the loan or anything like that. Be sure that you don’t plan on using these features if you fix a loan.
Will rates rise enough:
You will save money on a fixed rate loan if the interest rates rise above what you are paying. However, if the rates do not rise enough then you will have paid too much onto the loan.
If you want to leave a fixed rate loan you will have to pay break costs. Be sure you know what these fees are as they can be quite high and you may find yourself locked into an expensive loan.
Are you sure they will rise
With fixed rate loans you are basically betting that the rates will rise. This section of the article will explain why you should be sure:
How sure are you.
If you are unsure that the rates will raise then you may not want a fixed rate loan. If the rates do not rise you will have paid too much money onto the loan account during this time:
Split the loan:
To hedge your bets and give yourself some peace of mind you may want to split the loan when you apply for a fixed rate. By splitting the loan you will fix part of the amount owing and leave the other part on a variable rate. By doing this you will still save money when rates rise but won’t lose as much money if they do not.
It's more than the interest rate
Although interest rates are important when considering taking out a home loan it may not necessarily be the most important factor. “It's more than the interest rate”, you may hear your loan advisor say to you at various stages during your considerations, although your own personal thoughts may remain fixed on costs.
The cost of your loan will of course be the main component of your bottom line but this can often be overwhelmed by the increased value of your home if you have structured your loan in the proper manner. In other words the home loan best suited to you as an individual may not carry the lowest interest rate, it may well be judged more suitable because of the features it has embedded in its structure, features that could enhance your own personal lifestyle.
By saying it's more than the interest rate we, of course, are addressing the differences between home loans. No two home loans are exactly the same and the differences we are talking about don't just rest with the fees and charges.
Some of the features various home loans offer over and above the interest rate component are contained in the following mortgages:
- Portfolio home loan. A portfolio home loan better suits the home buyer who is looking for a more "hands on" type of mortgage that gives flexibility and allows personal control rather than have all control left in the hands of a lender.
- Line of credit home loan. This type of mortgage attracts home buyers who pay off their home loan on a monthly basis, especially a loan structure where the home buyer is only required to make regular interest payments. A line of credit home loan also allows the home buyer to access additional funds when required for renovation, repairs or for any other reason.
- An offset savings account attached to a home loan. An offset savings account that is attached to a home loan is best suited to home buyers who have considerable savings that they can retain in a savings account which will considerably lower the interest component of the loan repayments.
- Fixed interest rate home loan. This type of home loan has traditionally carried little in the way of features but in recent years many lenders are offering fixed interest rate home loans with features matching that of the more popular variable interest rate home loan. It is usually taken up by home buyers who are entering the market at a time when it appears interest rates are about to rise.
- Basic home loan. The basic standard variable interest rate home loan is what the name suggests. It is structured to suit the home buyer who is looking for an low interest rate home loan in order to finance the purchase of his or her home without having to pay extra money for the various features offered by other mortgage documents, which he or she may not want or have any use for.
To help home buyers decide if it's more than the interest rate alone that they are looking for, the following check list has been devised. It will help you determine exactly what you are looking for in a home loan over and above any interest rate concerns. Some of the points to consider are:
- Read, talk and make inquiries as to what level of flexibility you are looking for in a home loan.
- What do you intend borrowing money for in the future? e.g. when will you need a new car? when will the home need repairs or how long before you will need that extra room to be built on?
- How vulnerable do you feel you are to any upward movements in the interest rate.
- Don't be hesitant about seeking financial advice on your future intentions. You will find it will be money well spent - and such advice may even turn out to be tax deductible.
- Determine your other savings intentions, things like holidays or education for your children.
- Determine how much money you feel you will be able to retain in your bank account every month.
- Make sure you are clear on whether you intend to make minimum payments each month off your home loan or do you intend to pay your mortgage off as fast as possible.
- List all the changes you expect you will experience in your income over the first five years of your home loan.