RATE YOUR KNOWLEDGE
How well do you know the ins and outs of your home loan?
BUYING a house is not as simple as stumping up the cash and moving in.
Buyers need to navigate a lot of information about both the property transaction and the home loan before they can settle in.
A study from super fundowned bank ME shows that 41 per cent of Australians are confident they have the right home loan for their situation, but this falls to 15 per cent for young homebuyers.
ME head of home loans Patrick Nolan said the biggest mystery was fixed and variable interest rates.
“The bulk of people in the Australian market have variable rates. That’s probably not the confusion. It’s how they can partner that with a fixed-rate offer,” he said.
“Sometimes people are confused about the break fees or the ability to split between fixed and variable rates.”
Mr Nolan said many customers didn’t understand how an offset facility worked.
Chris Gray, Your Empire chief executive and host of Your
Property Empire on Sky News Business channel, said buyers didn’t need to know everything about the property and loan markets but they should know enough to avoid making bad decisions. They should also be prepared to call in expert help.
“I’d be going to a mortgage broker and as long as you find someone reasonable and your mortgage fits into a regular kind of box, let the broker do their work,” he said. “Five per cent of your time should be on your
mortgage and almost 90 per cent should be building your knowledge of property.
“The mortgage can save you a few thousand dollars but buying the right property at the right price can make you tens or hundreds of thousands of dollars over a five to 10-year period.”
So what are some of main mortgage terms?
Fixed interest rate: This is when a loan’s interest is “fixed” at a rate that won’t change for an agreed length of time. However, making extra repayments or changes to the loan are commonly restricted. Fees to break out of a fixed-rate period can be quite high.
Interest-only loan: This loan allows borrowers to pay only the interest on the loan for a certain time, meaning lower repayments.
insurance: Homebuyers borrowing more than 80 per cent of the value of a property are charged this insurance, which protects the bank if a borrower defaults on a loan.
Loan-to-value ratio: This compares the size of your loan to the value of your property.
Offset account: Deposits in a savings or transaction account linked to your home loan can offset the size of your mortgage when interest is calculated. So if you have $30,000 in your linked account and a home loan of $400,000, the loan interest will be calculated on $370,000.
Rate lock: When you apply for a fixed-rate home loan, you will receive the fixed rate that applies at the time your loan is settled, not when you sign the contracts. Banks can offer a rate lock feature and you will get the lower of the two rates when the property settles.
Redraw: If you’re ahead on your repayments, some loans let you take money back out to use for something else, like a new car or extension. You still have to pay it back, though.
Refinance: This means closing down one home loan and creating a new one, which then pays out the old loan. This can be used to switch your mortgage to a different bank.
Repayment holiday: If you’re ahead on your loan, some mortgages let you take a break from repayments. This is especially helpful when finances are tight.
Split home loan: Splitting a home loan into separate accounts can allow borrowers to set one part of the loan to a fixed interest rate and the other part variable.
Variable interest rate:
Loans with variable rates go up or down in response to what’s happening in the money market. Borrowers can usually make extra repayments to reduce the interest bill and term of the loan.
Your Empire chief executive Chris Gray says buyers need to find the right balance in their financial knowledge to stop making a bad decision.