Discount Mortgages – Can You Get One?
Many basic home loans are available to home buyers with a discounted interest rate, but this can be a complicated road to travel, especially for first home buyers or those unsure of the right home loan for their needs. A discounted interest rate can often mean a proliferation in fees and charges, as this is the lender’s way to recoup their loss of interest income. Often a home loan will have a heavily discounted interest rate for the first 12 months. These are known as introductory loans or honeymoon loans, and once the honeymoon is over you can find you are paying an interest rate which is higher than the industry standard rate, for the remainder of the loan’s term.
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Types of Discounted Mortgages
There are a number of different ways lenders will discount their home loans to make them more affordable and enticing for home buyers. Therefore, make sure that you understand all of these discounted options when you are comparing basic home loans. A basic home loan is one of the simplest types of discounted mortgages, if you simply want to borrow enough funds to buy your own home, and aren’t interested in any bells and whistles. Some other easy ways you can secure affordable discounted home loan repayments include:
- A low fixed interest rate home loan. By removing many of the additional features lenders package up in a home loan, your loan will attract a lower interest rate because it is a simpler loan for your lender to manage. This is often the case with a fixed interest rate home loan, which doesn’t usually allow you an offset account or additional features during the fixed rate term. Therefore, if you can fix at the right time in the interest rate cycle, and hold onto a continuing lower interest rate, you will always be several steps ahead of the Reserve Bank’s decisions.
- Capped variable interest rate mortgages. With a capped interest rate you enjoy the flexibility of a variable interest rate, with the security of a fixed interest rate. For example, if the current standard variable rate from your lender is 7.00% they may cap your interest rate at 8.00%. Therefore if interest rates go down, your 7.00% interest rate will be discounted to, but if rates go up, your home loan rate won’t rise above 8.00% for the capped period.
- Honeymoon interest rates. Discounting your interest rate in the beginning with an introductory honeymoon rate can help you adjust to home loan repayments if you are a first home buyer, or simply free up more money for you to enjoy in your new home if you’re a next home buyer.
- Interest only repayments. For a reprieve from high home loan repayments you can switch your repayments from principle and interest payments to interest only. This means you’re not paying back any of the amount you’ve borrowed, only the interest which is accumulating. This feature is limited to certain lenders and loan types, and can often only be applied for up to 10 years.
- Higher deposit. The more deposit you are able to provide, the lower the amount you have to borrow, and the less you borrow, the less you have to repay. This is a responsible and sustainable way to discount your mortgage repayments because you don’t have to rely on your lender, the RBA or the economy, you can save as much as you like and bring down your home loan amount.
Fixed Interest Rate
A common way to obtain a home loan with a low interest rate despite official rates rising is to take out your home loan at a fixed interest rate. To truly benefit from discounted repayments with a fixed interest rate, you have to fix at the right time, before rates start to rise significantly. Otherwise you will have locked in a fixed rate at the top of the interest rate cycle, and as rates inevitably drop again, you can be stuck with the higher rate for your fixed term. To help you make this decision, contact Home Loan Finder to discuss the current interest rate cycle and where your needs and budget fit in.
Capped Variable Interest Rates
It is possible to protect your repayments from rising interest rates with a capped interest rate home loan. While a capped interest rate home loan doesn’t discount your rate or your repayments it does keep your rate low when official rates rise. Similar to a fixed interest rate, a lender will determine a capped percentage rate for a certain term. Your interest rate then won’t go above that rate, but if interest rates drop your home loan rate drops too, unlike a fixed rate home loan where you are protected from rises but also miss out on discounts.
Honeymoon Interest Rates
Home loans that are offered at a lower rate than the standard interest rate for a limited period are known as honeymoon home loans. They are particularly popular with first home buyers who have scraped together all of their savings to buy their first home, and can then enjoy lower repayments as they adjust to being a mortgage holder. Of course anyone can benefit from an introductory discounted rate, especially when you can choose honeymoon home loans with long introductory periods or even deferred repayments so you don’t need to pay off your home loan at all in the first few years.
Interest Only
An interest only home loan is not really a discounted home loan, but instead a way to cut the amount you pay each month by taking advantage of a loan feature. Many lenders will allow you to make interest only repayments for a certain period, usually between five and 10 years. This means that rather paying the higher repayment made up of both principle and interest, you are paying only the lower interest portion.
An interest only home loan can appeal to those wanting to discount their repayments, as well as to property investors. Property investors are relying on capital growth to increase the value of their property investment, their aim is not to pay off their loan and eventually own the property – instead they want to leverage that capital growth as equity for bigger and better investments in the future. Plus, on an investment loan, only the interest portion of the repayment is tax deductible, not the principle amount. Therefore, making interest only repayments as an investor makes tax time easier, and makes your money and your investment work harder for you, without you having to outlay more of your own money than necessary.
Even if you’re not an investor, the value of your property is likely to be increasing over time. Therefore, at the end of the interest only period you can still sell your property and use the sale price to repay the principle amount of your mortgage, and keep the increase in capital growth as a profit from the sale. Or you could choose interest only repayments for just one or two years, as you become settled into your home and advance in your career, and can then afford higher loan repayments for the rest of the loan term.
Higher Deposit
Not only will a higher deposit discount your home loan repayments, it will also increase the equity you have in your home from the beginning. For example, if you are buying a home for $300,000 and you put down a 20% deposit of $60,000 then you immediately have $60,000 worth of equity in your home, as equity is the difference between what you owe and what the property is worth, and that’s only going to keep increasing over time. Therefore, while you may feel like you are losing your savings by depositing them straight to your home loan, in fact they are working to create a lower repayment amount and they are still there as equity in your loan if you need them during your loan term, or when you sell.
Repaying your home loan doesn’t have to be a chore when there are so many different ways to discount your home loan repayments. Contact Home Loan Finder to learn more about how to make your repayments more affordable.
Related posts:
- IMB Discount Variable Home Loan
- IMB Discount Split Home Loan
- Discounted Mortgages to Pay Less Interest
- Introductory or Honeymoon Loan
- CUA Discount Variable Rate Home Loan
- Honeymoon Mortgages as Introductory Home Loans
- Capped Variable Home Loan
- Second Mortgages – Definition, Benefits & Advantages
- Interest Only Mortgages – How They Work
- Finding The Best Home Loan Rates
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