Sunday, 2 December 2012

Home loan features (and jargon)

For someone looking for a mortgage for the first time, the terminology can be confusing.  I’ve outlined some the main features and types of home loans typically offered below, but a glossary of home loan terms.

Home loan features

Variable rate v. fixed rate v. split loan

With a variable interest rate loan, repayment amounts vary during the term of your loan, as economic conditions change. They will increase or decrease according to whether the rate moves up or down.

A fixed rate loan can offer protection against rate changes, as your repayments will be for a fixed period of time.  Fixed rate loans are only for a limited time (usually up to five or seven years) after which time the loan converts to a variable rate loan.  Fixed rate loans are generally less flexible than variable ones and can have significant early repayment penalties.  I’ll discuss fixed rate loans in another post later this month.

Split loans combine some of the certainty of a fixed rate with some of the flexibility of a variable loan.

Line of credit

A line of credit consolidates a number of debts (home and personal) into one account.  It can simplify your repayments and reduce the headline interest rate you pay (e.g., if you consolidate high rate credit card balances into the account).  However, a line of credit can be very dangerous if you do not have a good track record in paying off your debt.