All you need to know for mum’s on the go!
As kids we spent endless hours in our cubby houses, scrubbing dishes in our mini plastic sinks and pouring pretend cups of tea for our visitors. We loved our houses; we were proud to show them off to our friends. It’s no surprise then that one of the biggest achievements in our adult lives is to own our own homes, to break the rental spell and take the plunge into the home loan abyss.
Finding the right home is the fun part, but the prospect of finding the right mortgage can be daunting and confusing. Here we’ve covered the basics – in easy speak! – of what you need to know and look out for when it comes to getting the right home loan.
A home loan is a loan advanced to a person to assist in buying a house. Unless you were lucky enough to win big on the lotto, or have been saving your hard earned wages since you got your first Saturday job, it’s more than likely that you will require financial help when it comes to buying a house.
When bringing up a family it’s important to know where your dollars are being spent and even more vital to know where and how to find the cheapest home loan for your needs. Remember a home loan is a long term commitment (kind of like kids!) so a difference between a home loan rate of 5.9% and 6% can impact you by tens of thousands of dollars over 25 to 30 years.
Fixed rate vs. variable rate
When applying for your home loan you will have to choose either a fixed rate loan or a variable rate home loan.
The interest rate for a variable loan will vary over time as it is dependent upon decisions made by the Reserve Bank of Australia. Interest rate fluctuations in the mortgage market determine how much you must pay back each month, so that can make the household budget tough to manage if interest rates suddenly rise.
A fixed rate loan is a loan that is taken out for a set number of years, most commonly between 1 to 5 years where the interest rate is set (fixed) and does not fluctuate with any changes in the financial market. This allows you to know and budget for your set monthly mortgage repayments, but fixed rate loans can come with less flexibility and on stricter terms than variable rate loans.
Interest only vs. principal plus interest
This has to do with monthly repayments. Choose an interest only home loan and you will only pay the interest portion of the loan to the bank, forever. You will never pay back the amount you actually borrowed. Kind of like when you get your credit card bill and you only pay the minimum required and the debt rolls over into the next month.
Unless you’re in the property market a short term capital gain, most residential home loan owners choose to pay their loans on a principal plus interest basis, which means each month you are paying back a portion of the actual loan value as well as the interest component. This is the only way you’ll pay back your loan in the long term.
How to find the best loan for you?
When trying to find the cheapest loan on the market the best place to start is online. More specifically, an online comparison website like Moneyhound.com.au so that the information is current, clear and concise. Moneyhound’s home loan finder tool requires you to specify how much you need to borrow, the term you want to take the loan out for (up to 30 years) and the repayment type (whether you wish to pay the interest only, or both the principle amount plus the interest). You will then be presented with the results of your search, showing the interest rates of the loans that match your requirements.
Finding the right loan for you then requires you to factor in the interest rate, upfront fees and yearly service fees, combined with the benefits that the home loan offers.
Making additional payments
As well finding the lowest rate loan to save money on interest, another way to reduce the total cost of your loan over its lifetime is to make additional payments. You may want to make extra payments after an inheritance or a bonus from work. Even something as simple as your standard pay rise could leave you in a position to make additional payments. Some loans won’t allow this so make sure you specify this when choosing the loan.
After years of making additional repayments, there may come a time when you need to access those additional funds and if your loan allows for this it is called a ‘redraw’. For example, if your minimum home loan payment each month is $1000 for 12 months, but you pay $1500 each month, a loan with a redraw facility will enable you to redraw the $6000 at a later date.
You might look at this feature as a cheeky way to put money aside for a rainy day, the next family holiday, school fees, etc. Be aware that this feature might incur a fee.
Is your loan portable?
You might not want to live in the first house you buy for the number of years you took your loan out for. Just because your home loan is long term doesn’t mean you have to stay in the same house or suffer exit fees and new application fees every time you want to move house. Do your research to see if your home loan is ‘portable’, which means being able to transfer your home loan from one property to the next without incurring any refinancing fees.
An offset account can save you thousands of dollars in interest over time, so look out for home loans with a 100 per cent offset account feature. With an offset account you can use your savings to reduce the total loan amount on which your interest is calculated. You could start by sending your wage directly into your chosen account. This way, the money you earn is immediately reducing the interest you pay on your home loan – even if you end up spending that money over the cycle of a month.
Home loans for single parents
A recent census by ABS revealed that one in six Australian families are single parent families. Families of 2.4 children will often feel the financial strain of day to day life, so it’s easy to understand that this would only intensify when the family is headed by only one parent.
Single parents will often be put off of buying as the ratio of expenses to income is often much higher. Some ideas to overcome this drawback would be to consider buying with a trusted friend or family member. With a secure income and the security of having someone to help out, this might make the borrowing process a lot less stressful. Having a large deposit will also help single parent families with buying property, as the higher the deposit, the lower the loan amount you request. Single parents should also research the types of governmental benefits that the banks consider to be income, as this will all help contribute to them being granted a home loan.
Switching to another home loan
If you’ve already got a home loan you are not locked in! You can shop around and you can switch banks. The fees to do this might be minimal compared to the savings you could make in the long term. According to new banking reform laws, any home loan taken out after 1st July 2011 will not require the borrower to pay an exit fee.
With so many options and benefits available, make sure you do your research so that you know you are getting the best deal. A little bit of work can go a long way, and can set you and your family up for the future.
Written by Hannah Collins, Yahoo!7 Moneyhound – Fetching you a better deal.
Moneyhound.com.au is a price comparison site that can help you save money across all your monthly bills. Try it now, it’s free.
Looking for more ways to save?
- 10 ways to save money as a single parent
- Rent vs. Buy: What’s the best option for your situation?
- Spring clean your mortgage and save thousands
- How to switch and get a better home loan deal