A home loan is an essential tool to buy property for most people. It spreads out the cost of a property purchase over several years rather than one single lump sum, which is unaffordable to most. This loan is then repaid in monthly instalments.
An interest rate is applied to the loan as payment for borrowing the money from the bank or lender. Therefore over the term of the loan, the borrower pays back more than the amount initially borrowed, hence it is recommended to shop around to find the product with the lowest interest rate to reduce the overall borrowing cost.
The monthly repayment is split between capital repayment that reduces the loan borrowed and paying off the interest on the loan. The loan’s interest rate determines both of these amounts, reinforcing the importance of an attractive rate.
Some lenders will allow borrowers to make a yearly percentage overpayment on top of their usual monthly repayments without incurring additional fees. In such cases, the home loan lender will either reduce the length of the mortgage or reduce the monthly instalment figure as dictated by the product’s terms and conditions. Also bear in mind that some lenders charge a fee for overpayments or if a borrower pays off their loan in one lump sum before the expiry of the term.
Interest rates are set by the country’s central bank. Lenders will peg their products against this figure and therefore available home loans can fluctuate depending on the overall economy. Interest rates are influenced by a supply and demand mechanism: demand for credit will push rates up and this figure will decrease with a reduced appetite for credit.
Interest rates will also shift when the economy needs a boost to draw in investors, hence some borrowers will try and remortgage their home loans when the economy is less buoyant and more attractive products become available.
As mentioned, the product’s terms and conditions will determine the possibility of paying back a loan early to secure another product. However, if interest rates have drastically dropped, paying fees to exit an existing home loan and paying for a product fee for a new loan can often make financial sense.
Lastly, some banks and lenders might be more flexible than others. This is worth investigating before securing the initial home loan should you forecast that your financial situation might change in the future. In such cases opt for a more flexible lender or product to aid in this transition.
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