Everything you need to know about mortgages
It is very important to understand mortgage before choosing the home loan that is right for you. Here you can find out how home loans work.
What is a mortgage?
A mortgage is a type of loan where real estate is used as collateral. A mortgage is typically used to finance your home or an investment property so you don't need to pay the entire amount upfront. The borrower then pays back the principal of the loan (the amount borrowed), plus interest, over a period of time through a series of ‘repayments’. The lender is usually listed on the title of the property until the borrower repays the entire loan.
Mortgage repayments generally consist of principal and interest. The principal is the amount borrowed from the lender to buy the property, while the interest is the cost of borrowing the money. However in some instances, a borrower may select to pay interest only repayments on their loan for a period of time, generally from 1 to 5 years, before making principal and interest payments. Interest only repayments are more popular for borrowers with investment loans.
How does a mortgage work in Australia?
Many lenders in Australia require a deposit of 20% of the value of the property, meaning they will lend 80% of the value of the property. Some lenders including loans.com.au will allow a 10% deposit, however, the borrower will need to pay for Lender’s Mortgage Insurance (LMI) and you might be offered a different home loan interest rate.
Typically, a mortgage in Australia is set up for 30 years, and borrowers can choose between a variable rate and a fixed rate mortgage. Some of the popular features of an Australian mortgage are an offset sub-account, redraw facility, split loan, and interest-only repayments.
An offset account is a separate account linked to your home loan. At loans.com.au we offer an offset sub-account which is a sub-account of your home loan account. The money you have in this account will offset the balance you owe on your home loan.
For example, if you have $20,000 in your offset account, and you owe $350,000, the net loan balance that interest will be calculated on will be $330,000. Any interest savings then go towards repaying the principal on your home loan. If you pay more principal, then you will pay your loan off sooner. This has the knock-on effect of saving you more money over time.
As the name suggests, interest-only payments allow you to only pay interest without repaying principal for an agreed period. This reduces your repayments during the interest-only period. However, once the period is over, your repayments will go back to a variable rate mortgage.
Types of mortgages
There are three main types of mortgage a borrower can choose from - a fixed rate mortgage, variable rate mortgage or split mortgage.
Fixed-rate
This is a type of mortgage where the interest rate is locked in for a certain period of time, usually between one and five years. So whether the lender's rates goes up or down, you’ll be making the same home loan repayments for the entire fixed-rate term.
A fixed-rate mortgage is an ideal choice for people who want to budget with certainty. This can also be a good choice for first-time homebuyers who are adjusting to the routine of making loan repayments, and also for investors who want to ensure a consistent positive cash flow in their investment properties.
However, the potential disadvantage is that if interest rates goes down, you will not be able to benefit from the savings enjoyed by borrowers on variable rates. A fixed-rate also has limited features as you usually can’t make extra repayments and may not have access to an offset sub-account. Moreover, if you decide to break your contract within the fixed-rate term, you will need to pay a break fee which can be very expensive.
Variable rate
Unlike with a fixed-rate, the interest rate of a variable mortgage can change over the life of your loan. If the interest rate goes up, your repayments will increase.
There can be potential savings if interest rates decrease. Also, variable rate loans offer a lot of flexibility compared to fixed-rate mortgages. This means you can add features to your mortgage like the ability to make extra repayments and have access to a offset sub-account.
While you can benefit from the flexible features and the savings from lower interest rates, you will be exposed to the risk of high interest rates which can affect your budget when making loan repayments.
Split loan
With a split home loan, you can ‘split’ your loan into multiple accounts, to reap the benefits of variable rate loans and fixed rate loans. This way you can reduce the impact of any rate rises while also having access to flexible features such as the ability to make extra repayments. You can choose how you split your loan, giving you flexibility to structure your loan to suit your lifestyle.
How long does my mortgage run for?
The life of your mortgage or how long it takes to repay your loan, will impact the overall cost of your mortgage and the size of your scheduled monthly, fortnightly, or weekly repayments.
With a longer term, the amount of interest to be paid will be higher, but each repayment will be lower. In contrast with a shorter loan term, repayments will be higher however less interest will be required to be paid over time, which may save you significantly when calculating the overall cost of your mortgage.
To find out more information on mortgages or to kick-start your mortgage application, chat to one of our lending specialists today.
Find out in under 2 minutes if you qualify for one of our low rate home loans.
About the article
As Australia's leading online lender, loans.com.au has been helping people into their dream homes and cars for more than 10 years. Our content is written and reviewed by experienced financial experts. The information we provide is general in nature and does not take into account your personal objectives or needs. If you'd like to chat to one of our lending specialists about a home or car loan, contact us on Live Chat or by calling 13 10 90.
