07 Dec Interest Rates & Repayments Types: tips
What you should know about Home Loans.
Most Australians will have a loan or mortgage to repay in their lifetime for either their owner-occupied property or an investment property. As there are different types of loans and repayments it is very important to choose the type that best suits your needs and requirements as this can save you thousands of dollars over the life of the loan.
While there are hundreds of different Home loans available they all have the same two components:
- Principal: – the total amount being borrowed
- Interest: – The amount you pay to the lender for the borrowed funds.
Interest Rates & Repayments Types:
Principal and Interest
Principal and interest (P&I) loans are the most commonly selected repayment type loan, as the loan balance will decrease over the term of the loan reducing the interest payable and increasing your equity position with each payment. As its name suggests, each repayment includes part Principal and part Interest. The term of this loan usually run from 20 to 30 years
Interest Only (IO) loans have an initial attraction that the individual repayments are less as only the interest component of the loan is being repaid. This loan type is particularly favoured by investor’s due to the smaller repayments and because all the repayments being interest component only are fully Tax deductable. The term of this loan usually ranging from 1 to 5 years at which time the loan will revert to a P&I Loan or be refinanced. As repayments do not include any ‘Principal’ repayment the balance owing on the loan will remain the same during the whole chosen IO period. IO loan generally attract a higher interest rate
Variable Rate refers to the interest component of the Loan. All lenders offer variable rates loan products and should be selected based on your specific needs. The interest rate may change during the loan period which will affect the amount of the repayments, by either increasing or decreasing the amount payable. The loan term remains the same, while the interest being charged to your loan can change hence the name, ‘variable rate’.
A Fixed rate loan is where the amount of interest charged is fixed for a nominated period usually 1 to 5 years. The advantage of this type of Loan is there is certainty about the amount of interest payable for the period of the fixed rate. This reduces any concern about increasing interest costs, however, there is always the concern with market fluctuation, that you will be unable to take advantage of a lower interest rate if interest rates drop. Fixed interest rates loans generally come with a higher interest rate than a variable rate loan.
Some lenders offer you a ‘mix’ of fixed and Variable interest rate loans. This allows part of the loan to be on a fixed interest rate and the other part on a variable interest rate to mitigate the risk if that is aligned with your requirements.
Honeymoon rate loans have a reduced initial interest rate to make the loan look attractive. If used to full advantage and the saving in interest are paid off the principal or accumulated in an offset account, these can be a great product to get ahead. However, after the ‘honeymoon period’, you will be left with an over-average interest rate that can cost you thousands in the long run.
At Northpoint Mortgages we ensure you are fully informed with all your options and the feature and benefits each loan fully explained to you to ensure you have the best loan option for your situation.
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