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.
Most people already have an idea of what a mortgage is and what it involves. But if you’re planning on taking out a mortgage yourself, it would be prudent to have more than just a passing understanding of it.
What is a mortgage?
A mortgage is a legal agreement between the borrower and lender, where real estate is used as collateral for a home loan. Essentially, when you take out a mortgage on a house, you’re using a loan to buy that property and using that property as a guarantee.
If you default on the loan, the lender will repossess the property to try to recoup the unpaid balance. This is why when you purchase a property with a loan, the lender is usually listed on the title of the property. The property’s title will only be transferred to the borrower when the loan is fully paid off.
Is there a difference between a mortgage and a home loan?
Although they’re often used interchangeably, there is a difference. The home loan pertains to the money being provided by the lender so you, the borrower, can use it for a real estate property. Meanwhile, the mortgage only refers to the agreement between the lender and borrower about using the property purchased as security or collateral for the loan.
How long does a mortgage run for?
Typically, mortgage terms range from 15 to 30 years. 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.
What is a mortgage payment?
This usually refers to the home loan repayment. Once the property is secured, the borrower will start making payments towards the principal of the loan, plus interest, for an agreed-upon period.
The principal is the amount borrowed from the lender to buy the property, while the interest is the cost of borrowing the money. In some instances, a borrower may select to pay interest only repayments on their loan for a period, generally from 1 to 5 years, before making principal and interest payments. Interest only repayments are more popular for borrowers with investment loans.
Types of mortgages
When talking about the types of mortgages, it typically pertains to the different types of home loan interest rates there are. Below is a quick overview of the home loan rate types:
Fixed rate
This is a type of mortgage where the interest rate is locked in for a certain period, usually between one and five years. So, whether the lender's rates go up or down, you’ll be making the same home loan repayments for the entire fixed-rate term.
A fixed rate home loan may suit people who want to budget with more certainty. This may also be preferred for first-time homebuyers who are adjusting to the routine of making loan repayments, and for investors who want to ensure a consistent positive cash flow in their investment properties.
The potential disadvantage is that if interest rates go 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 rate home loan typically changes 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 usaully offer a lot of flexibility compared to fixed rate home loans. This means you can add features to your mortgage, like the ability to make extra repayments and have access to an offset sub-account.
While you can benefit from the flexible features and the savings from lower interest rates, you may be exposed to the risk of increasing 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 can help reduce the impact of any rate rises while also offering 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.
To find out more information on mortgages or to kick-start your mortgage application, chat to one of our lending specialists today by calling 13 10 90. Or you can arrange a call, and we’ll reach out when it’s most convenient for you.
Disclaimer: The information provided in this article is general in nature and does not constitute financial or legal advice. Please seek independent professional advice tailored to your circumstances before making any financial decisions.
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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.
