Products, policies and rates are constantly changing. We need to keep up to date with our home loan and make sure it is still suitable. I am sure your circumstances have changed in the past year and I know for a fact that loans have. Letís take another look at the basics of home loan borrowing.
What do Mortgage Repayments cover?
Normally you would look at having Principal and Interest repayments on your home loan. In effect this means that you are reducing the principal (balance) every time you make a payment. You will eventually repay your debt. This type of payment is usually recommended for your owner occupied property. However, if you speak with your accountant they will be more likely to suggest making interest only repayments on an investment home loan. This is due to the fact you will only receive a tax benefit on the interest amount you pay each month. In these times of under employment we are seeing more clients consider the option of taking interest only payments for the first few years of the loan, to enable them to minimise their monthly outgoings while they are getting settled into their new home. This should not be a long term arrangement. Most lenders will give you the option of having monthly, fortnightly or weekly repayments. The repayments are calculated as a monthly instalment, but you are able to have the payment deducted for any of the other repayment frequencies. In my opinion you should consider either a fortnightly or weekly payment. This will save you interest on your home loan by reducing the loan term.
What is a redraw facility?
A mortgage with a redraw facility allows you to make additional repayments to the loan, thus accruing a surplus position which can be withdrawn at any time. The facility works in much the same way as an Offset account. However, with an Offset facility you will need to have a separate bank account which the funds are deposited into. With redraw the funds will go directly to the home loan. The interest saving is the same for both options. You should speak with a Professional Finance Broker to discuss this further.
When should you refinance your home loan?
In the past most people that took out a home loan were loyal to their Bank and usually stayed with them until the loan was repaid. Nowadays in Australia the average home loan will last about four to five years. This is allowing for refinancing, selling and payout of debt. Some reasons for refinancing your home loan are as follows: Getting a lower rate: This would probably be the most common reason for refinancing a home loan. In this circumstance you should speak with a Finance Broker to work out if there will be a benefit in refinancing the loan. You will need to take into account any costs involved in repaying the first debt and then setting up the new loan. More flexibility: When you first take out a loan you match the loan to suit your current financial and personal needs. Things change, however, including what you need from a home loan.
Perhaps in the beginning you were happy to have a basic loan to get the cheaper interest rate, but now that you are able to save a little you may want to have an Offset or Redraw facility. This will involve refinancing or doing a variation to your home loan. Make sure to check out if there will be any additional cost to arrange this. Using your equity: Depending on when you purchased your home or how much you have managed to pay off, you may have some equity you can access. The equity is the difference between what you owe and what your home is now worth. You can take out a separate Equity Line or refinance your loan and borrow the additional amount into one larger home loan.
What is a Low Doc loan?
This type of loan was created for the self employed applicant. However, we now are able to use this type of home loan for PAYG income earners if they are borrowing less than sixty percent of the market value of the property. If you are a self employed applicant you can look at borrowing up to eighty percent of the property value. In all cases your income will need to be disclosed, though the lender will not need to see proof of the income. This type of loan is ideal for those who have not yet finalised their financials with their accountant, or have difficulty providing proof of income via payslips or tax returns. Most lenders will allow you to apply the Low Doc policy to any of their products. Check with your Finance Broker about loan availability.
Are there other lenders besides banks?
In the past, the only home loan lenders were banks, credit unions or building societies. Now we have access to Non- Bank Lenders and Mortgage Managers. A Mortgage Manager or Non-Bank Lender goes into the financial market, obtains funds and then offers those funds to borrowers at a particular interest rate and with certain conditions. Once again, your finance broker will be able to assist. Since they have access to Banks, Mortgage Managers and Non- Bank Lenders they will be better able to find the institution that will best suit your needs. We encourage you to do your own research. The best way to do this is to employ the services of a Professional Finance Broker. They are unbiased and are dedicated to helping you find the best deal.*Disclaimer:The advice in this article is of a general nature only. Seek the help of a professional advisor before making any financial decisions.
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