Page 15 - Smartline eBook - First home buyer
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What type of loan is right for you?
There are different types of home loans you can take out, all of which can be useful in different situations.
• Variable rate home loan: Your interest rate will go up and down depending on factors such as the official interest rate set by the Reserve Bank of Australia. A variable rate loan can offer flexibility and benefits like an offset account or redraw facilities.
• Fixed-interest rate home loan: This allows you to set your interest rate for a fixed period of time – usually between one and five years. A fixed-rate loan offers certainty on your monthly repayment amounts. However, you may be restricted as to how many additional repayments you can make to pay down the loan faster and “break costs” often apply for exiting the loan before the fixed-rate period ends.
• Split loan: A combination of variable and fixed, allowing you to fix part of your home loan and leave the other part open to changes in your lender’s variable rate. A split loan provides the certainty of fixed repayments with the advantage of features such as an offset account or redraw facility.
• Line of credit: A line of credit home loan is a pool of funds you can access and repay. You apply for it in the same way as a home loan, but it operates a little like a credit card, in that you only pay interest on what you use, not on the whole loan amount. A line of credit can be useful if you need to access cash for big expenses. It gives borrowers flexibility on the amount they borrow and how often they
want to make repayments, so it can be useful for things like minor renovations. However, a line of credit usually comes with a higher interest rate than more traditional home loans.
 Understanding interest rates
Before you can understand home loans, you first need to understand interest rates. Your interest rate is the fee your lender charges for letting you borrow money. It’s usually expressed as a percentage of the total amount of the loan, and will affect how much you pay towards your home loan each month. Your lender will determine your home loan interest rate based on the official cash rate set by the RBA as well as a number of other factors.
As well as a headline interest rate, lenders are required to show a comparison rate. This shows the real rate you’ll pay based on the interest rate and most other fees and charges. This means it’s usually higher than the headline interest rate. Looking at the comparison rates across a number of different home loan providers will help you see how much you’ll likely pay over the life of your loan and will help you to better compare lenders.
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