Home Loans

With thousands of home loans available today, it can be difficult to figure out which one is best for your situation. But we’re here to cut through the clutter and help you find the right loan.

When you’re a first home buyer, keep in mind that all loans are based on two key factors:

• Principal: The sum of money you borrowed
• Interest: the amount of interest you pay, which is recalculated regularly based on how much you still owe.

When you are overwhelmed by loan options, an My LMI Group Broker can help you sort through thousands of loans to find those that suit your needs.

Principal & interest vs interest only

When choosing a home loan, you have a choice between paying your loan off in full over time or paying only the interest and allowing the principal amount to be added to your balance.

A P&I loan is a type of loan that requires the repayment of both interest and the principal amount, meaning that you pay off the balance in installments. P&I loans generally have lower interest rates than IO loans.

An interest-only loan allows you to pay back only the interest on your home loan without repaying any of your principal. As a result, you lower your monthly repayment instalments and may free up some extra cash in the short term. The interest rate could be higher than a principal and interest loan and there is generally a fixed period where you can utilise interest-only payments. Once the IO period ends, your repayments will jump higher as you now have to repay the principal as well as the interest.

Variable rate vs fixed rate vs split loans

Three types of loans are distinguished by whether interest rates change regularly, or if they remain the same for some period.

Variable Rate  Home Loans

This is a popular type of home loan in Australia. The rate at which you repay interest on the loan varies in line with movements in market interest rates, so you can expect your repayments to go up and down over the life of the loan.

Pros: If the cash rate decreases or your lender reduces rates, your interest rate may decrease and you will pay less interest. You could also make extra repayments on your loan, which may help you pay off your home loan faster.

Cons: If the cash rate increases or market conditions worsen, your interest rate may increase, which means you’ll pay more in interest.

Fixed Rate Home Loans

Fixed-rate home loans allow you to lock in a mortgage rate for a specific period, usually between one and five years. This could help you budget for repayments and protect you from increases in market interest rates.

Pros: A set repayment schedule can help you budget for rising interest rates.

Cons: Fixed-rate mortgages tend to offer less flexibility, and loan limits may apply to additional repayments. If market rates fall, you could pay more on your home loan, and if you want to end your fixed period early, you might be required to pay a fee.

Split Rate Home Loans

Some lenders will allow you to split your home loan into two parts: one part of your loan with a fixed rate and another part with a variable rate. This means you can have some protection from rising rates but still benefit from any interest rate cuts.

Pros: For example, a loan that is split between a fixed and a variable rate offers some protection against rising rates. The fixed rate portion of the loan may capture the savings of any rate cuts, and you might also be able to make additional repayments on the variable portion.

Cons: You cannot choose to apply extra repayments to the fixed portion of your loan.

Other Home Loan Types

There are still more types of home loans available within the categories of variable, fixed, and split-rate loans. Each type addresses different needs, so you could find one that suits you.

Basic Home Loans & Mortgages

‘Basic’ home loans are no-frills home loans that sometimes come with a lower interest rate and fees, but fewer features than other home loan types. Lenders define ‘basic’ differently; you should check carefully which features are available with any home loan.

Choose a home loan that only has features you are likely to use now or in the near future, so you can avoid paying a higher interest rate than necessary.

Offset Home Loans

An offset home loan allows you to link a savings or transaction account to your home loan, which enables you to make interest payments from your deposit account rather than from your income.

The balance of an offset account has a negative effect on the interest rate you pay on your home loan. For example, if you have $20,000 sitting in your linked account and the value of the home loan is $350,000, you will only pay interest on a home loan value of $330,000.

The higher your savings in your offset account, the more you could save on your home loan’s interest rate.

Package Home Loans

A package home loan, also called an ongoing discount home loan, combines a home loan with other financial products like a transaction account or credit card.

On the plus side, some or all of the bundled products may be waived, and you may receive a discount on the home loan interest rate. On the minus side, you may have to pay an annual package fee. It’s important to weigh up whether the fee savings outweigh the annual package fee.

Line Of Credit

This type of home loan provides you with a pool of funds that you can draw from at any time, and use to purchase any asset — shares, renovations, or even a holiday.

A line of credit is similar to a credit card, but in this case your home acts as security for the loan. In order to get a line of credit, you must have enough equity in your home. Equity is calculated by subtracting your remaining mortgage debt from the home’s current value.

Low-doc Home Loans

Self-employed people who don’t have the standard financial documents required for a conventional home loan can apply for a home loan with flexible income verification from My LMI Group. You’re local My LMI Group broker can help you sort out other paperwork.

A low-doc loan can come in both fixed and variable forms, but generally carries a higher interest rate than regular doc loans.

Mortgage Features

To benefit from the savings, convenience, and flexibility that home loans offer, you should consider additional loan features.

Some of these features include;

• Extra repayments: paying a little more off your loan when you have some spare cash available cuts time and interest from your loan.
• Redraw: this allows you to access any extra repayments made into your home loan as cash.
• It can be useful if you need cash for unexpected bills or anytime you need extra funds.
• Choice of repayment frequency: it may help to time your loan repayments with pay days.

Honeymoon Periods & Introductory Rates

Some lenders offer a low introductory rate to help you ease your way into a home loan. Some home loans have a honeymoon period, which is a temporary amount of time—often between a few months and two years—when the rate on your loan is lower than normal. The lower rate gives you time to get into the swing of living with a home loan and may leave you with some extra cash each month for things like kitting out your home with furniture.

Loans come with a period of interest-free or low-interest payments, known as the ‘honeymoon period’. When that period ends, your loan will revert to its ongoing interest rate which could be much higher than what you had been paying.