Home loans are also known as mortgages and simply refer to a long term loan that is taken out by an individual or individuals specifically to purchase a residential property.
It’s a massive financial commitment and perhaps the most difficult and time consuming loan type to secure. The loan is in essence a secured loan since the property that you are buying is technically held as security for the loan. In the event that you default on your home loan the bank, credit union or alternative home loan provider will simply repossess your home and sell it to recover their money.
There are three main types of home loans and this includes the fixed rate, the floating rate and the interest only home loan. The type that you choose to go with will depend on your particular needs and takes cognizance of your income, expenses, available deposit and the value of the property you intend to purchase.
For first time home buyers there is a significant amount of assistance and specifically designed products which are intended to assist you in every way possible to make your home buying experience the simplest and most affordable possible.
Fixed Rate Home Loans Explained
When you take out a fixed rate mortgage you will be paying a fixed installment every month for a period of up to 5 years where after the rate will become variable and your repayments will then fluctuate as with a typical floating rate home loan.
With this loan type both the interest and the principal loan amount is repaid at the same time. The main advantage of the fixed rate mortgage is that you will know exactly what your repayments will look like for the fixed rate period and will be able t budget much more effectively.
The only thing you have to be aware of is that making additional payments on a fixed rate mortgage may not be possible and if you do not want to honor the loan contract and switch to a different type of loan product you will have to pay a termination fee.
Floating Rate Home Loans Explained
Floating rate home loans are ideal for people who want a little more flexibility when it comes to their home loan. With this loan type, as with the fixed rate mortgage discussed above, the principal loan amount and the interest is repaid simultaneously.
Floating rate loans are quite unpredictable and follow the market which means while you may benefit from lower installments some months you may face unexpected spike and have to pay more the next. The main advantage of a floating rate home loan is that you can make additional payments at any time without penalty.
This allows you to pay off your home quicker and therefore save money. In addition if you choose to sell the house before the loan term is over you can do so without penalty. This type of home loan offer the most flexibility but may not be ideal with those who have a tight budget.
Interest Only and Line of Credit Home Loans Explained
Interest only loans are typically chosen by investors and people who want to sell the property shortly after acquiring it. It involves repaying the interest on the actual loan alone rather than both the interest and the principal loan amount at the same time, as is the case with both fixed rates and floating rate mortgages as discussed above.
This type of loan type will allow you to secure low monthly or weekly repayments for a period of up to 5 years after which the loan will change back to a floating or fixed rate loan and the principal and interest will have to be paid thereafter.
Another type of home loan is the line of credit home loan which allows you to access money based on the equity that you own in the property. This isn't really a home loan but a line of credit set up on the equity already owned on a property.
Features offered by Home Loans
Most home loans typically carry a loan term which ranges between 20 and 30 years but the loan term you end up with depends entirely on your specific situation and goals. It is important to note that not all home loans are created equally and some products on the NZ market are significantly more competitive than others - so much so that some home loan products are simply not worth it in comparison.
It is certainly important to decide which loan type from those discussed above suits you best so that you can accurately compare various finance offers in the same league. In addition to the features as explained above, home loans may or may not come with a list of features which includes offset accounts, redraw facilities, extra repayment allowances, penalty-free loan type switching and more. All these factors carry significant weight and you must certainly take them into consideration before making a decision.
Comparing Home Loans
When it comes to home loans there are significantly less providers than with personal loans and car loans - so you can certainly go through all of their details within a fairly reasonable space of time. Both mainstream banks, alternative providers and credit unions offer home loans and it is typically the terms and conditions that you need to focus on rather than looking at solely the interest rate they are offering. This is because while one lender may offer you a significantly lower interest rate on a home loan they may have more stringent loan terms or hefty nonpayment and early repayment penalty fees and this is something that you want to consider before taking the plunge. Luckily there are a number of free home loan comparison sites which allow you to consider the majority of products on the market and to compare them fairly easily. Once you've identified your top 2 or 3 lenders you can then either approach them for an offer or ask for a conditional pre-approval so that you can get the opportunity to shop for the best deal.