A sound financial investment that you can leverage for life!
Home loans otherwise known as mortgages are long term loans applied for by an individual or individuals to purchase a residential property.
A home loan is probably the single, biggest debt that anyone will incur in a single purchase. However, it is also one of the soundest financial investment one can make. A mortgage is secured in that the property being purchased stand as collateral for the loan. The house can as a result be reposed and resold in the event of payment default. It is how lenders ensure they will recover their money.
Before applying for a home loan it is important to create a budget to ensure that you have sufficient monthly income to make your repayments. You can apply for a mortgage by completing an online loan application form or by visiting your local bank or credit union.
Three main types of home loans
There are three main types of home loans, which are fixed rate, the floating rate and the interest only home loan. Your income, expenses, available deposit and the value of the property you intend to purchase will determine the most suited home loan for you. Although there are many online UK lenders you can also use traditional lenders like banks and credit unions.
Here are the main types of loans
Variable rate home loan
Basic variable and standard variable rate home loans are the cheapest and is the simplest form of home loan, with a few extra features. The interest rate is market index rate dependent and can consequently change, which could affect your monthly home loan repayment.
Fixed rate home loan
A fixed rate enables you to budget better as the repayment is set for a period of five years, or as otherwise agreed.
Split home loan
A split home loan is a mixture of a fixed and variable rate mortgage and offers you the features of both types, and will differ greatly from lender to lender.
Line of credit loan
This mortgage is designed for your salary or regular income to be paid into your mortgage account and you will then draw money from the account for expenses just as you would with a credit card. It has its advantages in terms of interest charged to your loan.
Mortgage offset loan
You mortgage and savings accounts are linked up and you also benefit from lowers interest, which could help you repay your home loan sooner.
Fixed rate home loans explained
A fixed interest rate means that you will be paying a fixed instalment every month for a period of up to five years. Thereafter, the rate will become variable and your repayments will then vary. The interest and the principal loan amount are repaid at the same time. This option is suitable if you want to know exactly what your repayments will be for the fixed rate period. It helps home buyers budget much more effectively.
Floating rate home loans explained
Floating rate home loans gives you a little more flexibility when it comes to a home loan. As with the fixed rate mortgage, the principal loan amount and the interest are repaid at the same time. Floating rate loans are unpredictable as it follows the market, which means while you may benefit from lower instalments one month but possibly higher repayments the next. With a floating rate home loan, you can make additional payments without any additional fees or penalties. Home buyers can as a result pay off their home loans quicker and consequently save money. For the most flexibility, if you do not have a tight budget, a floating rate home loan might be your best bet.
Interest only & line of credit home loans explained
This is an option mostly chosen by investors and people who want to sell the property shortly after attaining it. Only the interest on the actual loan as oppose to the interest and the principal loan amount at the same time. You will be able to make low monthly or weekly repayments for a period of up to five years.
Features offered by mortgage loans
Typical home loan repayment period ranges between 20 and 30 years and depends on a number of factors. As a potential home buyer, you need to decide which loan type from those discussed above suits you best so that you can accurately compare various home loan finance offers.
Home loans come with a list of features which includes offset accounts; redraw facilities whcih enable you to take out a personal loan based on repayments already made, extra repayment features, penalty-free loan type changing and more. These are the factors that you should take into consideration before making a decision on a particular home loan.
If you have a deposit, you can start looking for a home loan. Home buyers should apply for pre-approval for a home loan. Pre-approval offers these benefits:
- You will know exactly what falls within your budget
- Easier to search for and view properties that are within your budget
- Gives you an advantage if you find the right home as you can make an immediate offer
- Gives you stronger negotiating power
- Allows you to quickly move into your home
Comparing home loans
Home loans are available from mainstream banks, alternative providers and credit unions. Unlike most other loan types, it is advisable to concentrate on the terms and conditions rather than looking at solely the interest rate home loan lenders are offering. The reason for this is that the interest rate might look quite favourable but that might also include strict loan terms or expensive non-payment and early repayment penalty fees.
A free home loan comparison sites enables you to consider the majority of products on the market and to compare them fairly easily. You should then identify your top two or three lenders. You can then either approach them for an offer or ask for a conditional pre-approval. Conditional approval will allow you to shop around for more deals before finalising your loan agreement but gives you security should you find the property of your dreams sooner than expected.
Although a home loan is a huge undertaking, by making informed decisions, you are able to make the process of owning a home much easier, and functional. Buyers should ensure that they have all the essential information needed to make an informed decision at their disposal before signing any home loan agreement to safeguard you, and guarantee you investment is a sound financial choice.