There are so many types of different mortgages to choose from, each with a different interest rate, fees, and flexibility.
Each one of these mortgages affects how much a loan will cost and how long the repayment will take before the loan is paid off. The interest rates can be fixed, floating or a bit of both. There are different repayment options available for your comfort.
It can make your head spin, but let me help you understand them more clearly.
Understanding the interest rates
How do fixed interest rate loans work?
If you have a fixed rate home loan, it means the interest rate you pay is fixed for a period time of 6 months up to 5 years. When the end of the term of your fixed period, you can choose between re-fixing your home loan or choose a new term or move to a floating rate.
What advantages do you get?
You get to know exactly how much of each repayment will cost you over the term. Companies compete with fixed-rate specials more often.
If your timing is right you can lock in on lower rates if the market interest rates are climbing.
Any fixed rates can often have limits on the amount you want to raise repayments on or make extra payments without paying charging fees.
When you take a long term, there’s a risk floating rate that may drop below your fixed rate.
When you want to sell your property and have to break a fixed loan you can be charged a ‘breaking fee’.
Capped rates are a variation where the interest rate cannot rise above a certain point but will drop if floating rates drop below the capped rate.
Explaining floating rates
Floating rate loans will rise or lower the interest rate as the interest rates in the busier markets change, they are normally linked to the Official Cash Rate (OCR). This means your repayments will go up or down depending on the market.
You can have more flexibility by making changes without a penalty, like paying off your loan early or just changing the loan term.
It is much easier to consolidate other, but more expensive debt in floating rate loans by borrowing a little more.
Floating rates have always been higher than fixed rates. When the rates go up then the repayments will also go up, that means you don’t know how much your repayment at the end of the month will be.
When you choose a mix of fixed and floating rates
It makes it able for you to split a loan between fixed and floating rate. This will let you make extra repayments without being charged extra on a floating rate portion.
When splitting your loans can give you a balance between the certainty of a fixed rate and the flexibility of a floating rate. It depends on how much of your loan you have in each portion depending on which one of these loans are more important to you.
1) What is a table loan?
It falls under the most common loans. You can choose a term that is up to 30 years depending on the lender. Many of the early home loan repayments will pay off interest, while the later payments pay off the initial amount you borrowed.
Table loan can be taken as a fixed rate of interest or a floating rate. Application fees for table loans can cost you from over $1,000. Most lenders charge around $200 to $400 and are often negotiable.
Table loans provide regular repayments and dates when they will be paid in full.
Table loan offers the certainty of knowing what your payments will be, depending if you have a floating rate, this will mean repayment amounts can change.
Fixed regular repayments might be difficult for people that have an irregular income.
2) Revolving credit loan
Revolving credit loans work like an overdraft. Your pay goes into your account and your bills are paid out of the account when they are due. Keeping the loan as low as possible, you get to pay less interest because lenders calculate the interest on a daily basis.
You can make repayments to your account and redraw the money up to your limit. Some of the revolving credit mortgages gradually reduce your credit limit to help pay off the mortgage quicker.
The application fees on the revolving credit home loans can go up to $500 and there can be a small fee for day-to-day banking transactions you do through-out your account.
If your finances are well organized, you will be able to pay off your mortgage faster. This also includes people with uneven income as there are no fixed repayments. Rather put a surplus fund into this account than in a separate saving account this will give you bigger interest savings and also avoid the tax on the savings account interest.
Your repayments need discipline! You can be tempted to spend up to your credit limit and stay in debt longer.
3) Offset mortgages
An offset mortgage can reduce your amount of interest that you pay on a mortgage. Interest is repayable on the full amount of the loan. By linking your loan to any savings or everyday accounts you pay less interest.
For example, someone with an $800,000 mortgage and $40,000 in savings would pay interest on $760,000. Just subtract the savings from the total of the loan amount and you only pay interest on what is left of the amount.
The more cash you keep in your account from day to day, the more you can save. Remember that interest is calculated daily. Linking your accounts – whether it’s from a partner, parents or any other family members it means less interest to pay.
You can pay less interest and that way you pay off your mortgage faster. Typically there is no fixed term.
Your linked savings accounts do not earn any interest when they offset on a loan. Interest on debt is higher than the interest you would earn on savings, which makes the offset worthwhile.
4) Reducing a loan
Reducing mortgages with the same amount of principal with each repayment will reduce the amount of interest each time. Repayments will start high but reduce over time. These fees are similar to a table loan.
You pay less interest than with a table loan because early repayments include a higher principal.
This suits borrowers who expect their income to drop, for example, if one partner plans to quit work in a few years.
When we manage higher payments, it’s better to take a table loan with repayments higher for the whole term, so that you pay less interest.
You pay only the interest-only part of our repayments, not the principal so that the payments are lower. Borrowers take an interest-only loan for a year and then switch to a table loan. Keep in mind that normal table loan application fees do apply.
You will have more cash for other things like renovating your home.
Overall it costs more. You will owe the full amount you borrowed until the period ends and you start repaying the loan.