11 Feb Choosing a mortgage for you
Your goal should be to:
- Pay the smallest amount in interest and charges.
- Be debt-free in the shortest possible time.
So when you consider a home loan, look at all the added costs.
For most people the interest rate is the biggest factor when choosing a mortgage – but it shouldn’t be the only one. Some low-interest-rate loans lack the flexibility needed to get out of debt quickly. Finding a mortgage that will work for you is a matter for your own self-analysis.
Try to identify your saving and spending habits. Many people who operate a line-of credit facility consolidate all their accounts and have their salary paid directly into it. Immediately their salary reaches the account, it starts reducing the principal and lowering interest charges. However, there may be a limit to the number of transactions allowable with this facility and charges may apply.
Also be honest about your weaknesses. A line-of-credit facility provides ready access to a large sum of money. If you’re not disciplined in your spending then a more traditional mortgage with less ready access may be better for you – and provide a form of forced saving.
This last point needs an explanation. Your family and financial circumstances may change – you may do a major renovation or make a career change that affects your payment patters. There could be any number of reasons why the loan you take out today may not suit you in five years time, so ask what costs are involved in switching to another product.
Did you know?
To evaluate the real cost of your loan, calculate your payments over the life of the loan – including all charges.
Did you know?
It is important to match your mortgage with your personality and career. If you’re paid infrequently and in large sum amounts, a line-of-credit or redraw facility may suit.
Fixed versus variable rates
Picking market movements is difficult. Economists each day suggest why interest rates will go up, go down or stay the same. It seems everyone has a different opinion.
So how are the rates set? The Federal Reserve Bank sets official interest rates independently of the Federal Government, taking into account a range of economic indicators. The interest rates offered by lending institutions move up or down in response to official rate changes plus other market factors – including the competitive nature of the mortgage market itself.
In choosing between fixed and variable rates, the answer again is to know yourself and your situation. How important is certainty to your situation? And don’t only look at fixed versus variable rates, but also which features will help get you out of debt in the shortest time.
Be aware that the interest rate quoted could change in the time between your application and the loan establishment. This depends on Reserve Bank movements and the market itself. Lending institutions generally guaranteed rates for a certain period of time and in some cases you can lock in the rate by paying a fee.