If you’re thinking about owning your own home, chances are, you’ll now also be considering a loan to facilitate that process.
For purchasing an existing home, the loan you apply for is a general home loan
When building a brand-new home, the loan you apply for is known as a construction home loan – this loan has a different loan structure to a general home loan.
Taking out a home loan (also known as a mortgage), is a necessary aspect of life for most Australians looking to enter the property market. For first home buyers and first home builders, it’s probably the most overwhelming concept to get your head around, especially with the increasing number of home loan options available on the market and the various factors that influence it.
Regardless of the number of loan types available, the amount that the home loan will cost you is fundamentally based on three things
Principal – the amount you borrow
Interest – how much you pay to borrow the money. Interest is calculated on the outstanding amount
Fees – these fees can vary depending on the lender you choose
In this article we will explain both the regular home loan and the construction home loan.
REGULAR HOME LOAN
What is a home loan?
In its simplest form, a home loan is a loan advanced to you by a bank or lender, enabling you to buy a house. The majority of Australians can’t afford the high cost of a home upfront, hence the need for a home loan. The loan – which you will then pay off over an extended period of time (usually 25 or 30 years) is secured against your property. What this means is, that if at any time you are unable to consistently make your loan repayments, your lender will require you to sell the property to settle the debt.
Types of home loans?
To decide which type of home loan is best suited to your circumstances, it’s important that you better understand how each works. Without proper understanding of home loan features and structure, it is easy to get overwhelmed. The home loan types listed below are some of the most common available to Australians.
Variable Rate Home Loan – Is a loan in which the interest rate charged will change as the market interest rate changes. This means that your payments will vary as well.
Flexibility – You can make extra repayments (helping you to pay off your loan sooner)
Offset Account feature – An option where you can place a portion of your income into an offset account to subtract from your home loan principal.
Redraw facility – If you’ve made additional repayments, you borrow some of the money you’ve already paid (should the need arise)
Easier to switch – It is generally easier (and cheaper) to switch loans if you’re on a variable rate home loan.
Inconsistent budgeting – this type of loan makes it a bit harder to budget as payment amounts fluctuate with market rates
Fixed Rate Home Loan – As the name suggests, with this home this home loan offer a fixed (locked in) interest rate for a specific period. During the “fixed” period which can be from one to ten years (depending on the lender), your interest rate and your loan repayments won’t change.
The main and most obvious advantage to a fixed rate home loan is that it gives you certainty of repayment, allowing you to better plan and prepare financially.
Interest rate increases won’t affect you
Little to no flexibility – any large additional payments can’t be made, and should you want to re-finance your home loan, you are likely to face break fees
Rate drops won’t apply to you
Split Home Loans – Is a mortgage by which part of your loan is on a fixed rate and part is on a variable rate. This type of loan offers somewhat of a middle ground, giving you the flexibility of the variable rate loan with the security of the fixed rate loan.
You get to enjoy the advantages of both loan types depending on the life stage of your loan
You can also be affected by the disadvantages of both loan type depending on the life stage of your loan and your
Interest Only Home Loan – Is a loan type where you (the borrower) is required to pay only the interest and any subsequent fees for a fixed period of time – this I usually for a short period of time (1-7 years depending on the lender), after which, the loan repayments will revert to a interest and principal loan structure. An interest only home loan is popular among investors who claim the interest as a tax deduction. It’s also popular among buyers who only plan on holding on to the property for a limited time before selling it.
It’s important to note that an interest only loan will not be a viable options for every home buyer – the smaller the amount of the loan principal that you repay, the more overall interest you will end up paying on your loan over the years (once the interest only period has ended).
Smaller repayments initially
Financial stress once the interest only period ends, and you can’t service the interest and principal (combined) repayments
Pay more interest – the more principal you have owing the more interest you end up paying
You don’t build equity – the principal element of the home loan repayments is what contributes to your equity in the home (the more principal you repay, the more equity you have in the property), therefore, for the duration of the interest only period you do not have any equity and are reliant solely on the property value increase should you wish to sell during that time.
Line of Credit Home Loan – Otherwise known as ‘Home Equity Loans’ is an open-ended loan that is borrowed against the equity in your own home. The amount you borrow will depend on the amount of equity you have in your home. It’s important to realise that this type of structure is not a “free for all” because after you draw from your line of credit you will need to make extra repayment to compensate or you run the risk of extending the life of your loan.
Important to note: a line of credit mortgage is not generally a loan set up to purchase a property, but rather set up against the equity in an existing property. This loan type is only a good idea for very diligent buyers who can strictly manage their spending.
You have access to credit (should you need it) for a particular time frame
You could pay lower interest because the loan is secured against your property (and you’re therefore seen as a lower risk to lenders)
Poor loan management could result in you losing your equity (or even your house) if you struggle to make the repayments
CONSTRUCTION HOME LOAN
As the name suggests a construction home loan is specifically established for those prospective home owners that are building a home rather than buying an established home. The loan structure of a construction home loan is different to a loan for an established property. Building a property is generally a straight forward process however a construction home loan allows for what is known as a progressive draw down. Reputable builders like Ausmar Homes have a strong network of suppliers and service providers across the entire house build process, including construction home loan and financial advisory specialists.
The total amount of the loan is generally based on the aspects of the property upon completion of the build. However, the draw down of the loan, or the amount you borrow, progressively increases throughout key milestones of a build. Generally, a construction loan will be interest only for the first period of the loan and then revert to a more typical principle and interest arrangement.
As the loan is being progressively drawn down, interest and repayments are calculated based only on the funds used so far. For example, if by the third progressive payment, only $150,000 has been drawn down on a $300,000 loan, interest would only be charged on $150,000.
Most lenders will require you to use all of your previously released equity before they will release the proceeding payments.
The takeaways from this would be
There is no ONE home loan that is the be all and end all or a one size fits all option. So be sure to align yourself with experts in the industry who can help you navigate the process and find the best home loan option for your particular circumstances and plans.
Getting a foot in the property market is no longer an impossible dream, you can now have an Ausmar Home to call your own with a deposit as low as 10k. This exclusive first home buyer solution gives you the opportunity to build a brand-new home with Ausmar Homes and all you need is;
To have a solid rental history, even if it’s as short as three months,
To be able to qualify for the state governments first owners grant and
To have a clear credit history
Ausmar Homes first home buyer’s solution (as with all our home builds) is backed by honesty, integrity and transparency throughout the entire build process.
Simply contact our First Home build specialists and we’ll be in touch and have you on your way to owning your first home sooner than you thought.