Housing availability and affordability is a hot topic at the moment. But if you want to grow your family in a home that really feels like yours, then buying is the way to go. And if you’ve made the decision to finally find your own slice of the property dream, it pays to know which mortgage loan is best for you.
Whether you’re after low monthly repayments or want to pay off your home before the kids go to the uni, you’ll find some sound mortgage advice from us below. We’ve outlined the most common mortgage types for first homebuyers to help solve the mystery of mortgage repayments.
If you want to pay off your mortgage as fast as possible…
A variable interest rate home loan might be a good option. This type of mortgage gives you the flexibility to make extra repayments as often as you like, so that you can fast track the process to reducing your debt. And when you’re ahead on your loan, you can transfer the money back out should you need it. This is called redraw which can come in handy in sticky spots, but we don’t recommend accessing this for non-emergencies.
When you pay off your mortgage quickly, you’ll also be able to build equity for your property in the process, too. Equity is the difference between what your home is worth and how much you owe your mortgage lender (what you borrowed). If your home is valued at $600,000, and you owe $200,000, then you have $400,000 in equity – note that the lender won’t let you access all of that. Pay off your home loan faster, and you’ll have more equity. This equity can be crucial down the track should you choose to upgrade to a new home or start investing.
It really does pay to get on top of your repayments at the start of your home loan. As you reduce the balance, there’s less interest being charged, and more of the repayment goes towards reducing the balance, rather than the interest
If you want to save on interest…
We recommend considering a variable rate home loan that’s linked to a 100% offset account. Consider this type of bank account your magic piggy bank. It’s a normal bank account, except any money deposited – your income, earnings from shares and dividends, etc – can save you interest on your home loan. For example, if you have a $100,000 home loan, and $9000 in your offset account, you’ll only be charged interest on $91,000. Simple!
If you want reliable monthly mortgage repayments…
Consider for a fixed-rate home loan. You’ll be able to pay off your loan consistently – because you’re locked in to a set monthly repayment and interest rate. No surprises from the bank a few months down the track when the Reserve Bank of Australia changes the cash rate!
On the flip-side, you might also end up locked in to a higher interest rate (not likely in the current market!). You’ll get limited options to make extra repayments, if any at all. There’s minimal chances of being able to link an offset account, and if you can, it’s usually capped at 30%. Following the above example, if you have a $100,000 home loan, and $9,000 in your offset account, you’ll be charged interest on $97,000. Not as effective.
Don’t get sucked in to the allure of a low monthly repayment. Always ask your lender for a fact sheet and make sure you understand the total amount – principal AND interest – that will need to be paid back over the course of your home loan.
If you’re already on this type of mortgage and it’s not working for you – don’t stress. These rates are generally locked in for a set term, usually two, three or five years. After that period has finished, your rate reverts to a variable rate home loan, and you’ll have the choice for how you restructure it without being hit by break costs.
If you want to invest and claim tax cuts…
If you’re not planning on living in your property but want to rent it out instead, an interest-only home loan can save you money when you also have a home loan. When you have an interest-only home loan, you’re only paying the interest due, and not reducing the actual loan amount (the principal). You’ll be able to claim the interest on your investment debt on your tax (let’s call this good debt) where the interest on your owner-occupied home can’t (let’s call this bad debt). It’s usually better to reduce your non-claimable bad debt first, and leave the claimable good debt high. This is a tax thing which you need to speak with your accountant about.
Because you want it all…
Then get the lot. As mortgage brokers, we have the capacity to help you split the loan into two (or more) parts. What this means is you can have one portion of the loan at a variable rate that’s linked to your offset account. You’ll be able to save on interest, make additional repayments, and make a redraw if you need. The fixed portion provides you with the stability and security of a fixed interest. Best of all worlds! Talk to me.