RATE YOUR KNOWL­EDGE

How well do you know the ins and outs of your home loan?

Herald Sun - Property - - FRONT PAGE - PETER FARAGO

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.

Lenders mort­gage

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.

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