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The basics explained: What is a home loan? What types exist? - Urban Money

The basics explained: What is a home loan? What types exist?

What is a home loan? 

A home loan or mortgage is granted by a financial institution and is essentially a ‘leg-up’ to obtain something you want but don’t have the funds required to buy outright. Home loans are granted by a bank or an independent finance broker or ‘lender’, like us. The type of loan someone is entitled to differs depending on individual financial circumstances.

What happens if I’m granted a home loan and then can’t pay it off? 

In the case that a home loan is granted and the buyer is then unable to make repayments, you may be required to sell the property in order to settle the debt. 

Home loan option 1: Variable rate home loan

The interest rate on a variable rate home loan can fluctuate at any time and is regularly altered by the lender. This is because the interest rate is dependent on external factors like a change in the market. Due to this, interest rates can often be higher, but it’s not necessarily a negative thing. 

Advantages:

  • Flexibility – you can make additional payments on top of current payments and you ultimately pay less interest on your property repayments. 

  • If the interest rate drops, so does the amount of your repayments.  

Disadvantages:

  • Interest rates can go up and down at any given point, therefore it could become an amount that is out of your financial capacity. 

  • Interest rates are at the mercy of your financial institution/lender. 

Home loan option 2: Fixed rate home loan

A fixed rate home loan where the interest rate doesn’t change for however long the period is, which can vary from 1 – 5 years. When this period is up, your home loan will automatically turn into a variable rate loan unless you decide to re-sign a fixed rate contract. Fixed rate home loans are appropriate for those who like assurance and aren’t risk takers. 

Advantages: 

  • The repayment amount is based on the initial interest rate and doesn’t change therefore eases financial pressures 

  • You have protection against interest rate rises 

  • With fixed rate, you’re sure to be repaying the same fortnightly or monthly amount. 

Disadvantages: 

  • Inflexible – it can be expensive to break your contract or move to a better lender.

  • You’ll miss out on the benefits of any interest rate decrease over the timeframe of your fixed term. 

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