Which Home Loan Is the Right Choice for Me?

For most of us, a mortgage is the biggest financial commitment we will ever make. It pays to find the best one, and that process starts by understanding what’s available.

The two broadest categories

All home loans can be broadly divided into fixed or variable interest rate loans. With a fixed rate loan, you pay the same interest on every payment. If interest rates go down, you can’t take advantage of this; however, you always know exactly what your payments will be.

A variable interest rate moves with market forces. If rates go down, you may save quite a bit of money. Variable rate loans also typically allow you to make extra repayments so that you can pay off your loan more quickly.

Other types and terms of home loans

1. Introductory rate loans

For the initial period of this loan (anywhere from six months to four years) you will pay a very low interest rate. Once that period is over, the rate goes up. You can get an introductory rate loan with either fixed or variable interest rates. If variable, the loan’s interest rates will be fixed at a certain percentage of market interest rates.

These loans offer lots of savings during the introductory period. Additionally, they are often open options if you’re not eligible for other loans. With that said, the amount of money you can repay may be capped, and after the introductory period, you will typically pay the highest possible rate.

Who is this best for?

The introductory rate loan may be a good bet if you’re not eligible for any other type of loan. If you are able to get a significant introductory period without caps on repayment, you may also be able to leverage this to pay off more of the balance earlier than you otherwise could.

2. Offset account home loans

With an offset home loan, you set up a bank account linked to your mortgage. Everything in the bank account offsets your loan balance. This means you will make interest payments only on the “offset” amount rather than the entire balance.

The more money you keep in the account, the more quickly you can get to paying off your loan balance. Since interest is calculated every day, it helps to put anything in the offset account; even if you withdraw it a few days later.

With an offset home loan, it’s possible to save a lot in interest payments over the life of your loan. Your savings may reduce your mortgage costs, but you still have access to money if you need it. Plus, the money in the account does not compound interest and is therefore tax-free.

With that said, offset loans usually have higher, variable interest rates, and if you don’t have much cash to put in the account, you won’t get much benefit. Plus, with such a loan, there may be extra fees involved.

Who is this best for?

This is a great option for anyone who has some savings or inheritance that can sit in the account, unless you have an emergency need for it.

3. Construction loans

If you’re building your own home, this loan allows you to withdraw money from the loan only as you need it. When you’re in discussion with your professional home design team, for instance, you can make a withdrawal.

As you move on to constructing the various parts of the home, you gradually withdraw more. Whenever you make a payment, you only pay interest on the part of the loan you’ve actually withdrawn and used.

This typically results in lower interest payments over the life of the loan, and as a result, loan repayments during the construction phase are typically low. Plus, a loaning agent inspects each stage of construction before approving the next payment, meaning builder work is double checked.

The downside is that borrowing needs to be against completed property value; so if plans fall through you could be left with a lot to repay. Plus, most lenders will only approve around 65 percent of land value.

Who is this best for?

Construction loans are a great option for anyone building their own home; especially if you want peace of mind knowing professionals are checking up on your building work.

When looking to take out a home loan, consider the notes mentioned above to help you determine the best option for your specific needs.