Buying a house is a big decision. A lot of your decisions can boil down to one thing - your financial situation. This is important from the perspective of the type of house that you can afford to buy and how well you’ll be able to manage your cash flow and keeping up with your mortgage payments following the purchase.
As in many big life decisions, it’s essential to arm yourself with information before choosing a path to go down. The good news is that there’s plenty of help and assistance out there. Don’t be afraid to speak to a bank first - they’ll be able to provide you with relevant advice and information, free of any emotional persuasion that may come from family members and friends. A bank will be able to talk you through the home loans that they have available and match a solution to your own personal needs, requirements, and financial capabilities. They’ll discuss your exact financial situation and then help you to find a mortgage and repayment plan that you can afford - one that doesn’t over-stretch your finances and leave you struggling week-to-week.
While a banker or other financial advisor can help you to find a mortgage that’s right for you, it’s worth having an understanding of the different types of mortgage that are available so that you can more accurately discuss your wants and needs when it comes to choosing the home loan. You’ll also be able to identify the decisions that will help your financial situation now and understand how making those decisions will affect your financial situation in the long-term.
It’s also worth knowing that many banking and other mortgage-lending businesses provide a home loan calculator through their website. In the privacy of your own home, you can enter your dream home’s purchase price, the amount of deposit that you have, the terms of the loan and your preferred mortgage type’s interest rate and you’ll quickly be given an idea of how high or low your repayments will be. Armed with this information, you’ll have a better idea of the type of loan that suits you best.
The different types of mortgage don’t just come down to changes in interest rates. There’s a fair bit more to it than that. The banks themselves may offer their own tweaks and changes, as well as their own brand names for mortgages, but generally, there are a few key types of mortgage that are considered to be standard.
A table mortgage is the most common type of mortgage. Your payments include those against both the principal (i.e. the amount of money you need to purchase your house) as well as against the interest (i.e. the ‘cost’ of borrowing that amount of money).
The ratio of payment to interest and principal is the key difference that defines a table mortgage. At first, a significant portion of your payment goes towards your interest and a very small portion towards the principal. In fact, around 90% of your payment may be going straight into paying off your interest.
Throughout the term of the mortgage, this ratio changes and more and more of your payment is assigned to your principal.
With a table mortgage, the actual amount you pay each time typically stays the same - this can help you to budget more wisely for the future as you’ll have a good idea of how much of your weekly income will need to go towards paying off your mortgage.
Another benefit is that because the principal payments are lower at the start of your mortgage, you may be able to borrow a larger amount that you would under other mortgage types.
With a reducing mortgage, the amount you pay each time regularly decreases over the period of your loan.
Typically, the percentage of your payment that goes towards your principal is the same throughout the year but you begin your payments by paying a lot more against your interest. The amount that you pay on your interest then decreases over time.
Towards the end of your mortgage, your payments are much less as you’re only paying off the principal and a very small amount of your interest.
A reducing mortgage is a good option for those that have the cash-flow to afford higher initial loan payments and wish to be more and more comfortable financially over the life-time of the mortgage.
Interest Only Home Loans
An interest-only mortgage is one specifically designed for people who are expecting a substantial one-off payment into their bank accounts at a point in the future.
This loan is set up specifically for short-term borrowing. Initial payments are minimal as they are only being paid against the interest of the loan. At a pre-arranged date, you then make one final payment to pay off the last of the interest as well as the initial principal that you borrowed.
The typical scenario is: a person who has owned a home for a while and is looking to sell that home and purchase a new one. They haven’t yet sold their current home and so wish to take out a mortgage for the new home that allows them small re-payments until they can sell their home and pay-off the new mortgage in one lump-sum.
The benefits of an interest-only home loan come down to the fact that the initial payments are minimal and your commitment is only short term.