First home buyers have a lot to learn when it comes to purchasing a new home but perhaps nothing is more important to understand correctly than the terms of your mortgage. With the wide variety of mortgages available to first home buyers, things can easily become confusing.
Why First Home Buyers Need To Understand Their Mortgage Terms
Buying a home is a huge investment. It is likely to be one of the biggest purchases you will ever make and the terms of your mortgage will dictate how you budget and pay your bills for the next 15, 20 or even 30 years. It is vitally important to your financial health to make sure you get a mortgage with terms you understand and, more importantly, can repay.
Six Different Types Of Mortgages Available To First Home Buyers
First home buyers have several mortgage options available. Some of them are only exclusive to first home buyers as a way to help them get into their first home, while simultaneously boosting homeownership rates.
1. Fixed Rate Mortgage. Fixed rate loans have interest rates that never change. You will pay the same amount every month for the life of your loan. The advantage of fixed rate loans is in knowing exactly what your rate and payment are going to be every month, which makes it easier for you to budget your money. You are locked in to this rate even if interest rates change while you still hold the loan. This security, and peace of mind, is one of the biggest advantages to fixed rate loans. If rates happen to drop, you won’t be able to switch to them without applying to refinance your loan. However, it is far safer to be guaranteed your rate not getting any higher than you know you can afford, than to gamble on the uncertainty of, perhaps, saving a few dollars down the line.
2. Variable Rate Mortgages. Variable rate mortgages or home loans do not have locked in or fixed interest rates. The interest rate can vary with changes in the Reserve Bank of Australia’s interest rate. While this can result in lower interest rates and lower mortgage payments than a fixed rate loan can offer, as soon as the rate changes, your monthly mortgage payment is going to change too. If you can handle the fluctuations of interest rate changes and are willing to take a chance that rates will stay low, then a variable rate loan can be a good way to get a lower interest rate and, hence, lower your mortgage re-payment.
3. Honeymoon Or Introductory Rate Mortgage Loans. These loans are specifically designed with first home buyers in mind. During the “honeymoon period” you will pay a discounted interest rate on your loan. After the honeymoon period is over, typically 12 months, you’ll pay the standard variable rate. Introductory home loans are a great way to save money during the first year of your homeownership, but first home buyers must be prepared for the possible interest rate increase that follows when the honeymoon period ends.
4. Low Deposit. These home loans are also a good option for first home buyers. They are aimed at buyers who have a strong income but not much in savings for a deposit. With a low deposit loan the deposit may be as low as 5% of the purchase price of the home.
5. Low Doc Loans. These loans are a good option if you’re self-employed or can’t provide the typical proof of income needed to secure a home loan. If you have a good credit history, low doc loans may be right for you. They usually have higher interest rates since the risk is seen to be greater by the lender but they are a viable alternative to a traditional loan.
6. Construction Loans. Anyone interested in home and land packages should take a look at construction loans. These home loans are used to pay for both the land and the home. The builder is paid via instalments, which draws down the mortgage as the home is being built. During the construction phase, the payments are interest-only based on the balance of the loan that is being drawn down. This can be one of the most affordable ways to purchase home and land packages.
These are just a few of the different types of home loans that are available to first home buyers in Australia. Whenever you’re taking out a loan, take the time to understand the loan repayment requirements and never sign a loan you’re unsure of. Find a mortgage professional you feel comfortable with, who will answer all questions to your satisfaction, ensuring you get the best loan for your needs.