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How do home loans work?
A home loan is a financial product provided by banks and lenders to facilitate the purchase of a property. Here's a guide to understanding home loans, interest rates, and lenders' expectations.
Home loan vs mortgage
The terms "home loan" and "mortgage" are often used interchangeably and both refer to the funds borrowed from a bank or specialized lender to buy property. They represent the financial agreement where the borrower (homebuyer) receives a lump sum upfront and agrees to repay it over time, typically with interest. This loan is secured by the property itself, which serves as collateral for the lender in case the borrower defaults on repayment. Thus, whether you say "home loan" or "mortgage," you're essentially referring to the same type of financial product used to facilitate property purchase.
1-Home Loan Definition: A home loan, also known as a mortgage, is a loan taken out to finance the purchase of a home or real estate. It typically involves borrowing a large sum of money from a bank or lender, which is then repaid over a specified period with added interest.2-Interest Rates: Interest rates are the cost of borrowing money, expressed as a percentage of the loan amount. For home loans, interest rates can be either fixed (set for a specific period) or variable (can change in response to market conditions). The rate you receive depends on factors like your creditworthiness, loan term, and economic conditions.3-Banks and Lenders' Requirements: Creditworthiness: Lenders assess your credit history, income stability, employment status, and existing debts to determine your ability to repay the loan.*Down Payment: Most lenders require a down payment (deposit) towards the property purchase, typically a percentage of the property's value.*Income Verification: Proof of stable income and employment helps lenders gauge your ability to meet monthly repayments.*Property Appraisal: The property is assessed to ensure it meets the lender's criteria for value and condition.In return for lending you money, banks and lenders expect timely repayment of the loan amount plus interest. They secure the loan against the property, meaning failure to repay could result in foreclosure and the sale of the property to recover the debt.Understanding these fundamentals can help you navigate the process of obtaining a home loan and manage your financial commitments effectively.
What is the repayment period for the home loan?
The bank calculates your monthly (or fortnightly, if preferred) repayments over a specific period known as the 'loan term'. This term can be shorter or longer depending on different factors related to your application. By consistently making the minimum regular repayments throughout this term, you will fully repay your home loan by the end of the agreed period.
Why are there fees and interest ?
A bank or lender charges interest as compensation for lending you money. Your regular repayments typically include the interest accrued for that period along with a portion of your loan balance, unless you have an interest-only loan. Throughout your home loan journey, you may encounter various types of interest rates and fees
What assets do lenders use as security?
When banks or lenders lend you money, they require a physical asset as security. This means if you default on your home loan and communication breaks down, they can sell the asset to recover their money (known as a mortgagee sale).
When you buy a property in Australia, your ownership is registered on the Certificate of Title. The bank's mortgage over the property is also noted on the title, restricting changes (like ownership transfer) without repaying the loan. For example, if you sell your home, the sale proceeds must first repay the loan before the bank releases their mortgage to finalize the transaction
What is covered in my loan repayment?
Your home loan payment consists of two components: principal and interest. The principal is the amount borrowed from the bank, and with each repayment, you gradually pay back a portion of this loan over the loan term. The interest is the cost charged by the bank for lending you the principal amount, based on either a fixed or floating rate for your fortnightly or monthly payment period.
Is it better to make payments fortnightly or monthly?
Choosing a repayment frequency that aligns with your cash flow can impact how quickly you pay off your loan and the total interest paid. For example, more frequent payments (like fortnightly instead of monthly) can lead to faster loan reduction and lower interest costs over time.
Which part of my home loan is paid off first: the principal or the interest portion?
Your loan structure dictates how repayments are allocated. With table repayments (principal and interest), you pay more interest initially when the principal owed is highest. As the loan progresses, a greater share of your repayments goes towards reducing the principal, decreasing interest payments over time.
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