The right loan at the right time

THE RIGHT OPTION FOR YOU: Selecting the right home loan to suit your current and future circumstances can make buying a home much easier. Photo: Shutterstock
THE RIGHT OPTION FOR YOU: Selecting the right home loan to suit your current and future circumstances can make buying a home much easier. Photo: Shutterstock

With so many home loan products on the market, it can be mind-numbingly confusing when it comes to choosing the right one for your needs. But it is important you get to know the different home loan products available and which one will suit you best, according to independent mortgage broker, Morne Lombard.

"The home loan decision process is made complex with choice, and this can be seen as a good thing or an annoying thing," he said. "Choosing the correct loan type and structure - not just the advertised rate of your loan - can save thousands and years off the normal loan term so it is a very important decision to make.

Morne said sometimes not all options are available to you based on your current circumstances, being income and liability levels, job type and tenure for example.

"It is important when choosing the type of mortgage to not just understand the current requirements but also your medium to long term requirements and be able to facilitate the transition to those goals as well," he said. "Most banks in the market place will have differing criteria and credit policies to determine whether you are a fit for them or not, likewise we look to see whether the banks will fit your requirements too."

Morne said most home loans fall into the below categories:

  • Basic Loan (no frills usually with an application fee no ongoing fees with redraw)
  • Standard variable loan (usually taken out with an annual fee to unlock features like offset accounts rate discounts, waive normal fees and charges including application and valuation fees)
  • Fixed loans (set repayments allow for good cash flow planning as payments are stable over the fixed term period)
  • Split loans (combination of variable and fixed) This allows stability with the fixed portion and flexibility on the variable portion either a basic or standard variable

Morne said to help navigate the complexities of the loan choices available, it was best to have the options broken down to pros and cons of each option by a professional like a mortgage broker. "A mortgage broker will be able to tell you what options are available to you and demonstrate the reason for their proposal, and this will let you make an informed decision that suits your needs, not the banks."

According to Morne there are three simple ways to get ahead on your mortgage faster than the loan term:

  1. Paying more than needed (and trying not to access this again if possible)
  2. Paying more often (weekly rather than monthly)
  3. Having funds in an offset or redraw of your loan

Redraw and offset options: These options allow you to access extra repayments you have made over and above what was agreed to in the loan contract. These are predominantly found on variable loans but some banks now do have redraw and offset options on their fixed rates.

"The benefit of redraw and offset accounts is the ability to access funds if you require funds for emergencies or leisure activities like travel," he said. "The other benefit is the interest incurred by your loan is calculated daily and charged to you as a cumulative amount at the end of the month.

"By having extra cash sitting in either a redraw or offset account you reduce the interest charged and this essentially makes your agreed payment pay off more on the principal part of your loan than the interest the bank charges."