First home buyers – Different loan structures

When signing up for a home loan, as well as the standard fixed or floating options, there are generally three types of home loan structures you may want to consider, Offset, Revolving Credit and Capped home loans.

In this video we’ll explain each type of loan so you can decide if one of these structures might be right for you.

An Offset home loan gives you the ability to use the balance of your transaction and savings accounts to offset against your Floating home loan – and you only pay interest on the difference.

This could be a great option if you like to focus on saving for things you need, as well as paying off your loan. By reducing the amount of interest you pay, you could repay your loan quicker, saving you even more interest.

With a Revolving Credit home loan your daily transactions and home loan are combined into one account.

This way when your income is paid in, it immediately reduces your home loan balance. This can helps you save on interest charges. It also gives you the freedom to repay lump sums of your loan, or redraw additional funds up to your credit limit.

However with a line of credit readily available, it is important you stick to a budget so you don’t start dipping into your mortgage to pay for everyday items or things you don’t really need, and stay in debt longer.

With a Capped home loan you’ll pay less interest if rates fall. But the great news is that even if interest rates do go up, the interest rate you pay will never go higher than the capped interest rate. You can ‘cap’ your interest rate for one or two years and you can still pay off your loan or increase repayments usually without incurring any additional costs.

Finally, for those of you trying to reduce your interest payments even further, it’s a good idea to structure your home loan so you make your repayments fortnightly rather than monthly.

Why? Because although it is often thought that a month is two fortnights, but there aren’t 24 fortnights in a year – there are actually 26.

So by paying half of a monthly payment on a fortnightly basis you’ll actually end up making two extra payments a year. This simple change could help you to pay off your mortgage that much sooner.

To learn more about home loans and many other money related topics visit our Managing Your Money section on the Westpac website today.

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