Understanding mortgage terms
Home loans are so varied it is very difficult for one person to research them all. The following are basic terms you're likely to encounter when you begin to shop around.
Fixed interest
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You know exactly what your repayments will be for the period the loan is fixed.
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Interest rises and falls do not affect your repayments during this period.
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There are usually penalties for early exit and there may also be penalties for making extra payments.
No frills
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The interest rate is variable and usually relatively low.
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There may be charges for additional payments.
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The interest rate is subject to financial market variations.
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The loan may be less flexible than other variable-rate facilities.
Standard variable
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The variable interest rate will be slightly higher than a no frills loan.
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However, there will be more flexibility - such as allowing extra payments (as the old age says, you get what you pay for).
Did you know...
As the name suggests, variable interest-rate loans are subject to the variations of the financial markets. If interest rates begin to rise, repayments increase accordingly. Be aware of the risks and ask what fees apply to switching the loan from a variable rate to a fixed rate.
Split loans
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You can split your loan so that part is fixed and part variable - this can provide repayment stability along with relatively low variable rates.
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For example, you may choose to borrow $120,000 with $70,000 fixed and $50,000 variable. Repayments on $70,000 are stable and there is flexibility about extra payments on the $50,000.
Honeymoon rates
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A very low interest rate applies for the first 6 or 12 months, and then it reverts to a standard variable rate.
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Some loan may allow extra payments during the honeymoon period.
Redraw
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This facility allows you to borrow back extra payments made above the minimum requirements. Some borrowers may make substantial extra repayments and decide to redraw some of it for example, to buy a car. Redrawing at home-loan rates is usually cheaper than a personal loan.
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An added benefit is that the 'extra' money has been in your mortgage account reducing the principal and therefore the interest you incur.
Penalties
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These can apply in various circumstances - for example, if the loan is not paid off in a specified time or is altered from fixed to variable or split.
Mortgage offset
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This facility can offer tax advantages as well as helping you pay off your loan sooner. Rather than your savings deposits earning interest (which is then taxed), that interest is offset against your loan to reduce the interest payable.
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It works by making a notional calculation of the interest that would otherwise have been earned on your deposit balance. That amount is then applied to your loan, reducing the interest payable. This means that you do not receive deposit interest, and tax should not be payable on the amount applied to your loan. Because you pay less interest on your loan, you can be debt-free sooner without having to increase the size of your repayments.
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This option is available only where your savings and/or cheque accounts and your mortgage are with the same institution.
Line of credit
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With this facility you get access to credit at any time. The facility on its own or coupled with another mortgage product may give you access to funds of up to 80% of the home's value.
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There is usually no minimum repayment. Interest is simply added on for every month the funds are outstanding.
Fortnightly payments
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By paying fortnightly rather than monthly you pay a little more each year.
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The extra payment frequency should substantially reduce the loan term
Loan portability
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A portable loan can go with you as you sell and buy a new home.
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It may reduce establishment fees and other costs on your next property.
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Obviously you must stay with the same institution.
Ongoing charges
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These include monthly administration fees, withdrawal fees and exit penalties. Be sure to shop around.
Establishment fees
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These vary considerable. Some institutions charge large up-front fees but refund them if the loan is accepted. Others charge only for legal costs and valuation fees. Each institution is different, so get the details up-front.
Mortgage insurance
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This is generally required by institutions when they lend more than 80% (in some cases 60% of the value of the home. It costs up to 2% of the total amount of the loan and could run into several thousand dollars.
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Mortgage insurance does not protect you, it protects the lending institution. Should you be unable to service your mortgage, the institution will sell your home to retrieve the debt. Mortgage insurance provides the difference between the sale price of the home and the outstanding debt.
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