Do you find mortgage and finance talk confusing? You’re not alone.
It’s very important to understand mortgage before choosing a home loan option that’s right for you. Here, you can learn more about how Australian mortgage works.
What is a Mortgage?
First things first, what is a mortgage?
A mortgage is a kind of loan where real estate is used as collateral. Typically, a mortgage is used to finance your home or an investment property so you don’t need to pay the whole amount upfront. Then, the borrower pays back the loan, with principal and interest, over a period of time through a series of repayments.
Mortgage repayments consist of principal and interest. The principal is the amount borrowed from the lender used to buy the property. The interest is the cost of borrowing the money.
Fixed-Rate vs. Variable Rate Mortgages
There are two main types of Australian mortgage a borrower can choose from – a fixed-rate mortgage or a variable rate mortgage.
- Fixed-Rate Mortgage. This is a type of mortgage where the interest rate is locked in for a specific amount of time, typically between 1 and 5 years. So, whether the lender’s rates go up or down, you’ll be making the same home loan repayments for the whole fixed-rate term.
However, the potential disadvantage is that if interest rates go down, you won’t be able to benefit from the savings borrowers enjoy on variable rates. A fixed-rate mortgage also has limited features as you usually can’t make extra repayments. Also, if you decide to break your contract within the fixed-rate term, you’ll have to pay a break fee which can be quite expensive.
- Variable Rate Mortgage. Unlike a fixed-rate mortgage, the interest rate of a variable rate mortgage can change over the lifespan of your loan. If the interest rate go up, your repayments will increase. However, there can be potential savings if interest rates go down.
Also, variable rate mortgage loans offer a lot of flexibility compared to fixed-rate mortgages. This means that you can add features to your loan, like the ability to make extra repayments.
How Does an Australian Mortgage Work?
Many lenders in Australia need a deposit of 20% of the total value of the property. This means they will lend 80% of the value of the property. Some lenders allow a 10% deposit; however, the borrower will have to pay for Lender’s Mortgage Insurance and you might be offered a different home loan interest rate.
Generally, an Australian mortgage is set up for 30 years, and borrowers can choose between a fixed-rate and a variable rate mortgage. Some of the popular features of an Australian mortgage are interest-only repayments and split loan.
- An interest-only repayment allows you to only pay the interest without repaying the principal for an agreed period. This reduces your repayments during the interest-only timeframe. Once the interest-only period is over, your repayments will go back to a variable rate mortgage.
- A split loan allows you to have a variable rate on part of your home loan and a fixed-rate mortgage on the other part. This way, you can reduce the impact of any rate increases, while also having access to flexible features like the ability to make extra repayments.
Hopefully, you were able to learn more about Australian mortgages and how they work.
If you’ve got other questions, please don’t hesitate to let me know. I’d be happy to provide you with my expertise. Looking forward to hearing from you!
Will Bell Mortgage Broker is a mortgage and finance broker based in Melbourne specializing in residential home loans. Will is all about the average Australian understanding just enough of the broader economy to take action on your own personal economy. He is the host of the My Personal Economy Podcast which you can check out here.
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