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Home Loans Compared

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Home Loans Explained

Many people cannot afford to pay for a new house outright and instead borrow money from a bank in the form of a home loan in order to complete their purchase. The main thing to check when comparing home loans is the interest rate, though there are a number of other things that should be considered. There are many types of home loan products on the market designed to suit people in different situations.

Standard Variable Rate Home Loans

Standard variable rate home loans are loans that have a floating rate of interest that move in line with the official rate of interest set by the Reserve Bank of Australia. These are suitable for borrowers who believe that interest rates are likely to fall because obviously lower interest rates mean the cost of the loan also falls.

Fixed Rate Mortgages

Fixed rate mortgages or table loans are the most common type of home loan because it lets borrowers make regular repayments every week or month, Whilst the borrower does get certainty, they will not benefit from lower interest rates should rates fall. It should be said that should rates rise, then they do not have to pay higher rates either.

Interest-Only Loans

Interest-only loans allow the borrower to defer repayment of the principal amount for a specified period of time and only make the interest payment during the interim. It is expected that a repayment loan is taken out at a later date or that the principal is repaid in a lump sum.

Reducing Balance (Non-Table) Loans

Reducing balance (non-table) loans structure higher payments at the beginning of the repayment period which fall over the lifetime of the loan as the interest and principal amounts decline.

Revolving Credit Loans

Revolving credit loans operate like large overdrafts, in order to reduce the amount of interest payable it is best to keep the balance of the loan as low as possible by crediting salaries in the loan account and using the account to pay for things as they arise.

Offset Home Loans

An offset home loan links the loan to what is called an offset bank account, so the interest earned on your savings offsets the interest payable on your home loan. When the mortgage lender calculates the interest owed on the mortgage, the balance held in the offset account is deducted from the amount owed as mortgage and then the interest is calculated.

For example a borrower with a $250,000 home loan and a $50,000 balance held in the offset account will see the latter deducted from the former, and interest calculated on $200,000.

The big advantage with offset home loans is they allow the borrower to pay off the debt much faster than would otherwise be possible. So long as the borrower keeps depositing money in their offset account as often as possible and maintain the highest balance they can for the longest period of time, they will see will pay down the debt much faster than a regular home loan.

Offset home loans tend to attract both additional fees and higher interest rates. So a calculation has to be made by the borrower on how much balance they think they can hold in the offset account to make the offset home loan worthwhile.

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