Chances are, when you are searching for a property you won’t have the cash on hand to pay for it outright. Instead you are going to need to look into the idea of home loans. On this page I am going to discuss with you some of the various types of home loans that you have to choose from. I will briefly cover the advantages and disadvantages of each.
The first thing that I want to look at is the interest rates on home loans. All home loans will either be fixed interest rate loans or floating rate loans. With the former, the rate of interest will be set at the start of the term. The term can be anything from six months to five years. Floating interest rates will of course depend on the interest rate in that particular month. The benefit of a fixed rate loan is that you know exactly how much you are going to be paying each month, however if the interest rates fall you won’t be able to make any savings. With a floating interest rate your payments will take into account the prevailing interest rate each month. This means you may be able to make some savings if the rate falls but if the rate increases, you will have to cover this increase in your payments. There are of course many other advantages and disadvantages to each interest rate, but these are the basic differences between them.
So now that is out of the way, let’s take a little look at repayment structures. There are multiple ones to choose from:
- Table Loan: This is the most popular type of home loan. Here you will be taking out a mortgage over a certain term (say, thirty years). You will have regular payments to make and you know exactly when you are going to be paying the mortgage off. The downside is, if you don’t have a regular income it can be very difficult to meet regular payments.
- Revolving Credit Loan: If you have an overdraft then you will have some idea about what a revolving credit loan is all about. Here, you will have an account that you can pay off as and when you want. This is great for those who may have an irregular income. The downside is that you may be tempted not to pay back the loan right away and it can be very expensive if you keep letting that interest accrue.
- Interest Only: Here, for the first part of your repayment term (this depends on how long you have agreed with your bank), you will only be paying off the interest portion of the loan. Your monthly payments are going to be a lot lower than the other the types of loans above. However, at the end of the interest-only period you will still have a pretty hefty home loan to pay off. It would be a good idea to opt for this loan at the start (if you need to conserve capital to play around with) and then switch to a table rate at the end.
A good mortgage broker will give you more insight into the workings of these home loan types and will also help you structure your mortgage in a way that best suits your circumstances. In many cases, their services are free but be sure to take your time when choosing a broker – you need to be sure you feel quite comfortable with them as the relationship is quite a personal one.
