The Good News For Borrowers
The Age
Monday May 25, 1998
LOW INTEREST rates, coupled with home-loan features such as redraw, offset, split loans and lines of credits of all shapes and sizes, mean you almost need a degree to wade through it all.
The good news for borrowers is that an increase in lenders and competition has created a large variety of different home-loan options to choose from. The question is how does this benefit you, the borrower, and which one will suit you best?
Mr Tim Bolton, principal partner of MSA Mortgage Solutions Australia, an independent mortgage advisory firm, says borrowers should look at the full picture before deciding on a home loan.
He says this includes things such as their lifestyle, income - single or joint - savings, cost of living, children or no children, future plans such as renovations, new car, holidays etc.
"These are all important things that need to be considered to maximise the benefit of the large array of home-loan features that are available today," he says.
Repayments are usually made monthly or fortnightly but, in the case of a line of credit, extra funds sit in the account to help reduce the loan balance.
"One of our clients bought and sold shares, so he needed extra cash quickly. This was at the same time that he could also manage his credit very well, so a line of credit was a good option for him," Mr Bolton says.
However, he cautions that a line of credit is like a big credit card. "If it's not managed well it can leave the borrower owing the same amount as they borrowed."
Another option to the line of credit is the "all-in-one" type loans where extra funds offset the balance. The borrower doesn't have access to extra credit but their funds still sit in the account to reduce interest.
"This is a great alternative to the line of credit," Mr Bolton says. "If people don't need the extra credit they can benefit from the lower interest rate offsets usually offer and know their loan is being paid off."
Mr Bolton says people with higher incomes receive a greater benefit than those on lower incomes.
"If their income is low, a redraw at a lower interest rate may well be all that they need. We had a client with two children in high school and only one income earner. In this situation they wanted to make extra repayments and then redraw the extra repayments to pay for school fees. It was a great savings tool," he says.
Not only is it hard to find the right loan, but one of the biggest dilemmas facing borrowers today is whether to split their loan into both a fixed and variable part.
"We don't encourage splitting very often," says Mr Bolton, admitting that this seemed contrary to many reports.
"Often clients choose loans where they can split at any time with little or no cost, so instead of paying 6.95 per cent for three years they can begin by paying at the lower variable rate. If rates look like they are going to move up, then fix."
He suggests that if the borrower needs the security of knowing that their repayments won't change, a fixed loan is a good option.
Ultimately, what will suit one person may not suit another, so it is a good idea to have your individual needs assessed by a professional. You should feel comfortable about the lender and the loan you choose. There is no substitute for good advice.
Some things you should find out when choosing a home loan
* Fixed-rate break penalties.
* Ongoing monthly fees and charges.
* Refinancing penalties.
* Splitting fees/options.
* Government costs.
* Mortgage insurance.
* Legal disbursements.
* Mortgage discharge fees.
* Settlement fees.
Source: Tim Bolton, Mortgage Solutions Australia.
© 1998 The Age
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