When considering a mortgage, the first thing prospective borrowers often ask is, "How much will my loan repayments be?"
The short answer is, it depends on the type of loan you get. There are a number of products and options available to suit the variety of needs among borrowers. While this allows for more flexibility, it can also make the process of choosing the right loan much more confusing. This guide will explain the basics behind some of the most common options available.
Fixed-rate or variable?
One of the biggest decisions borrowers will need to make is whether to get a fixed-rate or a variable loan. What type of loan you get helps determine the amount you pay each month in interest.
The interest rate charged by a lender is generally based on the cash rate set by the Reserve Bank of Australia (RBA), as well as a number of other factors. Increases or decreases in the cash rate tend to affect how much interest borrowers pay.
With a fixed-rate mortgage, a borrower agrees to pay interest based on an unchanging rate for a set period of time, usually up to five years. During the established time period, a borrower will pay back a loan based on that fixed interest rate, regardless of any changes in the lender's interest rates. A fixed-rate mortgage when interest rates are low will protect you from having to pay more if rates rise. Should the interest rates fall, however, you will be still have the higher interest payments.
A variable mortgage, on the other hand, will have fluctuating payments that follow the changes in interest rates. Your payment will drop if rates do, but it will rise with them as well. Interest projections, while not foolproof, can help you make a decision about which type of mortgage is best for your situation.
Other loan options
Low-doc loans may be a good choice for borrowers who would not generally qualify for other loan types.
Borrowers also have the option of splitting their loan, setting a portion at a fixed rate while leaving the rest variable to change with interest rate fluctuations. If rates rise, only the variable part of your loan will be affected. Conversely, should rates fall, you will pay lower interest through the variable-rate portion of the loan.
Low-doc loans may be a good choice for borrowers who would not generally qualify for other loan types. Contract, seasonal and self-employed workers often are unable to provide the type of income documentation that lenders require. Under a low-doc loan, these borrowers could qualify with a slightly higher down payment and interest rate. It is important to note, however, that low-doc loans are not as easy to qualify for and are less common that more mainstream loan options.
Government assistance for first home loans
If you are a first-time home buyer, you may qualify for a First Home Owner Grant (FHOG), an Australia-wide program that offers a lump sum to people buying their first home. Most Australian citizens or permanent residents buying their first home qualify for this grant. Each state has different regulations that apply to the FHOG program, so it is important to check your state's program details to understand the program's benefits and to see if you qualify.
— AU Property News (@aupropertynews) August 5, 2015
Home buyers may also qualify for exemptions or discounts on stamp duty. Normally charged with the sale of land or property, stamp duty and its applicable concessions are determined by each state and impacted by a number of factors, so purchasers must check with their state's government to see if they meet the requirements for discounts or exemptions.
While this guide offers a general explanation of the many options for borrowers, personal and property-specific factors play a large role in determining the best first home loan for your needs. Contact a mortgage manager at Mortgageport today to see how we can meet your loan needs.