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How To Pick The Perfect Home Loan

by Martin Speedie on February 28, 2013

How To Pick The Perfect Home Loan

How To Pick The Perfect Home Loan - the coloured boxes above are clickable.

Principal & Interest Line of Credit With Visa attached Interest Only Line of Credit With Visa attached Principal & Interest 100% Offset with ATM Card Interest Only 100% Offset with ATM Card Principal & Interest 100% Offset Interest Only 100% Offset Principal & Interest Fixed Rate Loan with Extra Repayments Option Interest Only Fixed Rate Loan with Extra Repayments Option Fixed Rate with Principal and Interest Repayments Fixed Rate with Interest Only Repayments Standard Variable Loan with Principal and Interest Repayments Standard Variable Loan with Interest Only Repayments Principal & Interest Standard Variable with Extra Repayments option Interest Only Standard Variable with Extra Repayments Option


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Line of Credit with a Visa Card attached


To find out if you are suitable for a Line of Credit, ask yourself the following questions:

  1. Do you run your own business and often have money that sits in an account prior to paying suppliers?
  2. Do you have money in a savings account that is earning you interest?
  3. Do you pay a higher interest rate on your home loan than what you earn on your savings?
  4. Do you pay tax on the interest that you have in your savings?
  5. Would you need access to these funds quickly?
  6. Would you need access to more than $1,000 at a time?

If you answered yes to these questions, then you would most likely suit a line of credit product.

If the loan is for investment purposes, then an Interest Only Line of Credit may be suitable**. If the loan is for owner occupied purposes then a Principal and Interest is your safest product. This will ensure monthly reduction on your loan.

The Pros and Cons of Line of Credits
Pros:

  1. They are a great place to keep savings. If you have $30,000 sitting in your savings account and you earn 4.5% interest on the savings, over a 30 day period you would earn $110 interest in a month. If you had the same amount of money sitting in your Line Of Credit account, and you were paying 6.9% interest, you would save $170 per month. The interest on your mortgage payment would be reduced by the $170. You would be $60 per month better off with a Line of Credit than a savings account.
  2. You don’t pay tax on interest in a Line of Credit. In the above example, not only would you save an additional $60 per month, you would also save on tax on the whole amount.
  3. Some Line Of Credits come with Credit Card facilities, so you can have all of your direct debits coming out of the one place.
  4. You have access to your funds instantly with an attached Visa Card.
  5. Principal and Interest Line of Credits ensure that your mortgage constantly reduces every month.

Cons:

  1. Interest rates are often higher on a Line of Credit so you would need to consider how much money you would have sitting in your Line of Credit and if the interest saved is worth the extra cost.
  2. Some Line of Credits have monthly and annual fees.
  3. You will have access to your money. Some people do not have good budgeting skills so this product could be worse for you as you could over spend.
  4. **There can be tax implications for Line Of Credits that are for INVESTMENT purposes. You may not be able to claim on the interest, on a portion of the loan that has been paid for and then redrawn on. You would need to speak to your accountant to confirm tax implications. If this is the case see below for a 100% Offset Facility for Investors.

Tips for reducing your debt faster with a Line Of Credit:

  1. Put as much money as possible into the Line of Credit, this includes any savings, your salary and tax refunds.
  2. Make sure you limit your spending by setting up a good budget.
  3. Remember that every additional dollar you spend from your line of credit is money that you owe back to the bank. Think of it as the bank’s money, not yours.


Home Loans with 100% Offset Accounts


To find out if you are suitable for a Home Loan with a 100% Offset Account, ask yourself the following questions:

  1. Do you have money in a savings account that is earning you interest?
  2. Do you pay a higher interest rate on your home loan than what you earn on your savings?
  3. Do you pay tax on the interest that you have in your savings?
  4. Would you need access to these funds quickly?
  5. Would you need cash access to these funds?

If you answered yes to these questions, then you would most likely suit a home loan that has a 100% Offset Account attached.

If the loan is for investment purposes you may prefer an Interest Only loan. If the loan is for owner occupied purposes then a Principal and Interest is your safest product. This will ensure monthly reduction on your loan.

The Pros and Cons of 100% Offset Loans.
Pros:

  1. They are a great place to keep savings. If you have $30,000 sitting in your savings account and you earn the 4.5% interest on the savings, over a 30 day period you would earn $110 in interest in a month. If you had the same amount of money sitting in your 100% Offset account, and you were paying 6.9% interest, you would save $170 per month. The interest on your mortgage payment would be reduced by the $170. You would be $60 per month better off with an Offset account than a savings account.
  2. You don’t pay tax on interest on the money you save in interest on an Offset account. In the above example, not only would you save an additional $60 per month, you would also save on tax on the whole amount.
  3. You may be able to set up direct debits to come out of your Offset Account.
  4. You may have ATM and internet access to the funds in your offset account.
  5. The money is separate from your loan, so you will have confidence that every month your loan balance will reduce.
  6. You will have confidence that every dollar that you spend from your offset account is your savings, and not credit that you will owe back the bank.

Cons:

  1. Interest rates are often higher on Offset accounts so you would need to consider how much money you would have sitting in your Offset account and if the interest saved is worth the extra cost.
  2. Some Offset accounts have monthly and annual fees.
  3. You will have access to your money. Some people do not have good budgeting skills so this product could be worse for you as you could over spend.
  4. If you need access to more than $1,000 per day, you may have to go into a branch to withdraw your money.

Tips for reducing your debt faster with an Offset Account

  1. Put as much money as possible into the Offset account, this includes any savings, your salary and tax refunds.
  2. Make sure you limit your spending by setting up a good budget.
  3. Try to think of the money in your offset account as your money, if you think of it as the banks money it will make it less tempting to take out.


Fixed Rate Home Loans


To find out if you are suitable for a Fixed Rate Home Loan, ask yourself the following questions:

  1. Would you like to know exactly how much your mortgage repayment will be for a certain amount of time?
  2. Are you planning on starting a family?
  3. Do you plan on starting your own business?
  4. Are you feeling like a career change?
  5. Do you often feel that your spending is out of control?
  6. Does the smallest change in your expenses create extra stress on your finances?

If you answered yes to these questions, then you would most likely suit a home loan that has a fixed interest rate.

If you are starting a family I can absolutely recommend that you organize a fixed rate. A lot of people don’t consider the below questions when deciding whether or not to have a baby:

  1. Have you considered the cost of child care?
  2. Will both of you go back to work full time / part time?
  3. Will you be able to afford your repayments?
  4. Will you be able to maintain repayments?

The Pros and Cons of Fixed Rates
Pros:

  1. You know exactly how much your mortgage repayment is for a fixed period of time.
  2. You may have the option of making extra repayments.
  3. You can avoid worrying about monthly reserve bank rate decision as your rate will remain the same no matter how high the reserve bank lifts its rates.

Cons:

  1. You could lock your rate in and then have the interest rates drop after a reserve bank decision.
  2. Some fixed rates do not allow any extra repayments.
  3. If you want to exit your loan early or want to sell your home you can be up for thousands of dollars in rate break fees.
  4. Your additional repayments may be capped to a certain dollar value.

Tips for reducing your debt faster with a Fixed Rate Home Loan.

  1. Opt for a Fixed Rate product that allows extra repayments.
  2. Try to avoid redrawing the extra repayments as this will add to the term of your loan.
  3. Apply for a loan with a 20 or 25 year loan term to reduce the time you will spend paying off your loan. By reducing your loan term you can save hundreds of thousands of dollars in interest.

Other Information
Interest only Fixed Rate loans are great for investors as the change in the market won’t affect you or your tenants. It will ensure that you are set up for long term leases on your property without guessing what your repayments might be next year.

Standard Variable Home Loans


To find out if you are suitable for a Standard Variable Home Loan, ask yourself the following questions:

  1. Have you previously had a home loan product with bells and whistles that you didn’t use?
  2. Have you previously been locked into a high fixed rate and regretted your choice?
  3. Are you planning on paying off your home in a few years with a large settlement or inheritance?
  4. Do you want the freedom to move to another bank without additional fees and charges?
  5. Do you often feel that your spending is out of control?

If you answered yes to these questions, then you would most likely suit a standard variable home loan.

The Pros and Cons of Standard Variable Home Loans
Pros:

  1. Most Standard Variable Home Loans do not charge you to pay your loan off early.
  2. You may have the option of making extra repayments.
  3. You can avoid paying for things that you don’t use (like higher rates for Offset facilities, Line of Credits, and fixed rate lock in fees).
  4. If interest rates go down, you can have confidence that you aren’t locked into a higher rate.
  5. With a Principal and Interest Product your loan will reduce every month.
  6. You will be able to make your monthly repayment and forget about any additional spending coming from your home loan (like direct debits etc).

Cons:

  1. If you have savings in another account, you will be paying tax on your interest.
  2. There may be a cap on the additional repayments you can make each year.
  3. Your rate will fluctuate with the monthly reserve bank decisions.

Tips for reducing your debt faster with a Standard Variable Home Loan.

  1. Opt for a Standard Variable product that allows extra repayments.
  2. Try to avoid redrawing the extra repayments you make as this will add to the term of your loan.
  3. Apply for a loan with a 20 or 25 year loan term to reduce the time you will spend paying off your loan. By reducing your loan term you can save hundreds of thousands of dollars in interest.

Other Information
If the interest rates are high at the time you are looking at getting a new home loan, then opt for a standard variable. You know what goes up must come down, so always look for a product that you could switch to a fixed rate if one becomes available.

If you aren’t very good at budgeting try to send some money over every week to get your loan ahead, and remember that money that is out of sight and out of mind rarely gets spent.

Principal and Interest loans are the only way to go for owner occupier loans. This will ensure that you aren’t treading water and your loan balances comes down every month.

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