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 loan, with interest and principal, 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 consist of principal and interest. The principal is the amount borrowed from the lender to buy the property. The interest is the cost of borrowing the money.
There are two main types of mortgage a borrower can choose from - a fixed rate mortgage or a variable rate 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 aa 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.
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, weekly) repayments.
With a longer term, the amount of interest to be paid will be higher, but each repayment will be lower. With a shorter term, your repayments will be higher, but you’ll pay less in interest over time, which can save you significantly when you calculate the overall cost of your mortgage.
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 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 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 loan account. The money you have in this account will offset the balance you owe on your home loan.
For instance, if you have $20,000 in your offset account, and you owe $350,000, the net loan balance that interest is calculated on will only be $330,000. Any interest savings will then go to repay 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.
A split loan allows you to have a variable rate on part of your loan and a fixed rate mortgage on the other part. 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.
Lastly, interest-only repayments. As the name suggests, this allows 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.