As the mortgage lending industry becomes more and more competitive, lenders have started to offer ingenious, complex and sometimes downright confusing loan structures. That’s right folks, structure is one of the most overlooked factors when choosing a home loan.
Typically, the basic differences are clear to most of us lay people. We usually look at fixed vs variable rates. But did you know that there are a whole host of other structures you can look at as well? Case in point – repayment modes. You could choose interest-only or principle + interest repayment modes.
In fact, with the dizzying number of loan variations, it’s no wonder that it can be very overwhelming for hopeful homeowners. Often, as first timers you’d know more about your options by going to a home loan provider’s home loan home page. But a lot of people stop there. Instead, you should contact the lender via phone and find out the full catalog that they offer. Sometimes, they can arrange special deals for you!
Here are the various parts of a loan that you should consider:
Fixed vs Variable Interest Rates
Fixed interest rates means that the interest charged on your loan will remain at a certain percentage over the course of an agreed term. Variable interest rates can change over the course of the mortgage. Typically, they’re based on some underlying rate, like the interbank lending rate plus a few percentage points.
Typically, this doesn’t last for the entire mortgage because you can find a lender to refinance with. Still, you should choose an interest rate that you feel comfortable with.
How do you do that? Well, if you feel that interest rates might rise in future, you might want to stick to a fixed interest rate. If you believe that interest rates will fall, or are getting a good rate now and believe that rates will be predictable, then go for the variable rate.
Don’t want to predict interest rates? Simple. You might want fixed interest rates merely because they’re stable. This will allow you to easily plan your finances. Ideally, you’ll be the type of person who doesn’t mind paying more so long as you’ve got visibility over your monthly outgoings.
Interest Only or Interest + Principal
It isn’t common for one to pay the interest portion of the loan, but such loans do exist. In an interest only loan, you’ll be paying only the interest on the loan for a fixed period – typically 5 to 7 years. Why would anyone want to do this?
One possibility is that they’re only able to afford the interest component on the loan. They might simply want a dream home right now, but not have the income to cover both interest and principal.
Another reason might be that the borrower is looking to flip the house and doesn’t expect to hold on to the house for very long. In such an instance, they’re probably an investor. The lower monthly payments can go a long way into managing their cash flow.
Mortgages typically come with upfront fees to be paid for insurance, administration, brokerage fees etc. Some lenders offer no-fee mortgages, which basically means you pay no upfront fees. This can be a boon to anyone who would like to smooth out their outgoings, rather than pay a lump sum upfront.
Is there a free lunch? Typically, no. By not charging you fees upfront, the lender will usually recover the costs through a higher interest rate. More innocuous ways of “earning” on the mortgage is by encouraging you to sign up for saving/investment accounts, credit cards etc – that’s of course assuming they’re offering these services (you’ll usually see this with banks)
Looking for the right lender
Look for a lender and ask questions before choosing a loan. Find out as much as possible about a provider either from their website or via word of mouth. The best way of finding the right lender for your needs is from someone who already dealt with them and recommends their services.
Check as well how post-settlement issues are handled. Does the lender provide customer service consultants for these matters and are they dealt via a call centre or message service? Having direct ready access to decision makers will save you precious time and a lot of stress down the track.
It can be confusing to know whether to get a fixed rate or variable rate mortgage and what features are crucial. This is why it’s vital to not only check the right rates but make sure that you will get the right features in your home loan. Know more about your options by going to the home loan provider’s home loan home page. Best of luck!