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| Sunday, 20 May 2012 |
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Standard 'principal and interest' home loans |
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Friday, 18 January 2008 |
Most people take out a standard home loan, where you make regular payments to cover the interest on the loan as well as the principal amount borrowed. This usually takes place over an agreed time, for example 25 years. You can generally repay the loan in full at any time, although you might be charged a fee.
During the first years of a loan, nearly all repayments go towards paying the interest, and very little of the principal gets paid off. In the last years of a loan however, most of repayments go towards paying off the principal, with not much needed to cover the interest. For this reason, any extra amount you can afford to pay on your loan in the early years will cut far more time off your loan than paying extra at the end.
Whatever type of housing loan you choose, a mortgage is a major long-term commitment: being better informed about managing loans and mortgages now can help avert financial calamity later.
Variable or fixed interest?
Your interest rate is usually variable, which means the bank, credit union or other financial institution can increase or decrease it to match general changes in interest rates. You can get fixed interest loans where the rate remains unchanged for an agreed number of years, however the interest rate is usually a little higher than for variable loans. Fixed interest loans may also cost extra in fees and may not allow extra payments and charge very high fees if you pay out the loan early.
Choosing between variable and fixed interest can be a bit of a gamble, since nobody really knows whether interest rates will go up or down, or for how long interest rates will stay at any particular level. Sometimes people take a bet each way by fixing the interest rate on half their loan and letting the other half be variable.
Added features
Standard loans come in all sorts of packages, offering the basics with no frills or a wide choice of added features, such as redraw rights and mortgage offset accounts, that can involve extra fees or a higher rate of interest. Some features may suit you, but make sure you'll really get a benefit if they're costing extra. Find out more about mortgages and their added features.
Your mortgage
To protect themselves, your lender will take a registered first mortgage over your home, so that if you default, the lender has the right to sell your home to recover their money, including all interest and fees due and reasonable costs of sale. You receive any money left over.
Your mortgage will usually require you to keep your home insured, with the name of the lender noted on the insurance policy, to keep your home in good repair and to ask your lender for permission to alter your home. There will be other requirements as well, so you may need a solicitor to explain them.
Mortgages are regulated under state and territory laws. |
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