These days loan and credit card providers are obliged to disclose the key conditions and costs associated with their products in a far more transparent way than they used to. It is also generally easier and less costly to change lenders.
Nevertheless, you do need to be aware of and understand the key terms and conditions so you can make an informed judgement about whether the financial product is right for you.
Seek professional advice
If you are not experienced with loan documents it is always a good idea to obtain legal advice. It might be an extra cost but could avoid a huge problem for you down the track. A good mortgage broker will always be an asset to you to ensure that you’re getting the best deal available and that the key terms and conditions fit with your needs.
Key conditions to be aware of
1. Term
Most home loans have a term of 25 or 30 years. Remember the longer the term the more you will pay in interest. What is most critical is your ability to pay down the loan sooner.
2. Repayment Frequency
Monthly repayments are pretty standard, however there is no doubt that if you can structure your repayments fortnightly or even weekly you will save a significant amount of interest over the term of the loan. Your mortgage broker can show you exactly how much you will save.
3. Interest only or principal and interest
Most (but not all) home loan products require the payment of not just interest on the loan but also loan principal itself. This is generally a good thing anyway as you should be looking to pay down the loan as quickly as possible as the interest on the loan will not be tax deductible if you are living in the property. Interest only loans are more common for investment properties where generally the interest on the loan will be tax deductible.
4. Variable interest or fixed rate
Most variable interest rate products allow you to pay off your home loan faster however your are exposed to upwards movements in interest rates (but you will also benefit from decreases in rates). Fixed rates are generally available for 1 to 5 years, which will give you certainty about your repayments and there are a number of very attractive fixed rate products in the market at the moment.
There are often restrictions or limits on your ability to pay down your loan faster with fixed rate products, so be sure you understand what you can and can’t do. Often it can be a good idea to have part of the loan at a variable rate and part fixed. This will reduce the impact of interest rate rises but also give you the ability to pay down that part of the loan at a variable rate ahead of time if your circumstances allow.
5. Mortgage insurance?
Most banks will require you to take out mortgage insurance where you are looking to borrow more than 80% of the value of the property. This can be very expensive, so it’s important to clearly understand this cost before signing up to such a loan.
6. Loan establishment fees
What are they and how much are they.
7. Other fees and charges
Are there any other fees and charges associated with the loan. If it’s a credit card, are there annual fees applicable to the card. Annual fees can sometimes also be applied to loan packages.
8. Break costs
This is an area that has been improved in recent times with lenders restricted on what break costs they can apply where you want to pay out a loan either because you have the capacity to do so or more often where you want to switch to another lender.
However, you have to be particularly careful to understand what your break costs are if you have part or all of your loan subject to a fixed interest rate as these costs can be very expensive. Usually how long you have held the loan and the length of the fixed rate period will be the key determining factors in calculating your break costs.
9. Loan discharge fees
What costs will the lender charge to discharge their security and close down the loan.
10. Late payment fees
What are they and under what conditions are they applied.
11. Default clauses
It is important that you understand the lender’s rights in the event that you default on a loan. If you think that you will default on a loan, it’s better to get professional advice beforehand so you can communicate effectively with the lender.
12. Personal guarantees
For some loans, you may have to provide a personal guarantee. This will mean that in the event that you default on your loan, not only will the lender be able to sell the property to recover their loan, they can come after your other personally held assets. You should certainly seek advice before providing any personal guarantees.
13. What is offered as security
The property you are intending to buy will be the primary security, however are there any other properties or assets that are being offered as security and what are the risks to you in doing so.
14. Interest offset accounts
An interest offset account is a great way to reduce the interest on your loan. Many home loans come with this feature that allows you to deposit money into this type of account that reduces the interest that you would otherwise have to pay on your loan. You are then also able to redraw from the account when the need arises, such as for renovations or other family expenditure.
For professional assistance:
Legal: www.bellpartners.com/services/legal
Home and investment loans, debt consolidation: www.bellpartners.com/services/finance
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