The statistics regarding how many of the country’s population is in more debt than they can ever repay is staggering. Don’t get hung up on that, having a home loan can often work out cheaper than renting, if you go for the right one. Here’s a list of risky home loan options that you may want to avoid, to stay on an even footing.
As a general rule, variable interest rates are always lower than fixed (with exception to recent months in AUS). Banks have access to decades of data, which tells them, although they need to attract you with a lower rate, the chances of that rate increasing profits over time is greater than a fixed rate loan will return in profit. This is not to say variable rates are a “no-go”, often it is the better option depending on your individual circumstances, needs and goals for the future (consult with a financial planner). The simple rule is – a variable rate loan provides you with flexibility, however you ride the highs and lows. A fixed rate loan provides you with certainty.
You can fix your rate for up to 5-years at a time. Whilst I am always guided by what my clients ask for, I never like to see them fix for the full 5-years (unless they have consulted with their trusted financial advisors and have a solid plan). If you fix at the right time, yes you can stand to make some significant savings month to month, and on the overall cost of the loan. However consider, as I mentioned above, a fixed rate loan provides you certainty, but you don’t get the flexibility or extra features such as the freedom to make additional repayments. Often fixed rate loans have caps on how much in extra repayments you can make. So yes, you will save with lower repayments, but what will you do with that money? Also, we are all very busy living, our lives can be complicated, things change including goals for the future. If you are in a fixed loan and a significant life event occurs and you need to sell the property or refinance the loan, there are some hefty charges attached to exiting.
Another attractive looking home loan for those on a budget is an interest-only mortgage. This is typically reserved for investment mortgages as there are taxation advantages to doing so. Similar to fixed rates, you can only opt for interest only repayments for up to 5-years at a time. The downside is that you’re only ever paying interest, no principal. In addition to this, generally these rates are higher than principal & interest repayments. So, while you are only paying interest, it’s still at a higher rate than P&I repayments. You should only opt for this on your own home after consulting your trusted financial professional, and having a solid plan for the future. Again, the longer it takes you to pay off the loan, the more interest you pay.
Low Deposit Loans
Most often these loans are marketed to first home buyers, typically a younger buyer, with a smaller deposit, wanting to get into the property market sooner rather than later. The biggest downside is that you don’t have much equity left in the property by the time you’ve borrowed 95% to purchase it. The impacts of that include, you won’t be able to refinance until you only owe 90% at a minimum (fees apply). A the same time, I’ve always worked on the premis that I’d rather be paying off my own mortgage than someone else’s. Coupled with the fact, it may also be cheaper than paying rent. Just be careful of which banks or loans you look at. You can expect the rate to be slightly higher than the market standard, but it should not be more than 1.0 – 1.5% higher.
Now that you know what to avoid, you’ll be able to pick something that will work for you. For guidance on getting it right, contact Blackbox Finance through submitting an enquiry in the contact us box below, calling 1300 70 12 17 or sending an email to [email protected]. Blackbox Finance your trusted mortgage broker servicing Palm Beach, Currumbin, Burleigh Heads and the beautiful surrounding areas.