Important questions when deciding on a loan
Saturday, November 04, 2006
To ensure you choose a loan that will serve you well in the future, here are a few questions to ask yourself and discuss with your lending professional
1. Is there any chance that I will be paying off this loan within the first four years?
In other words…are you going to repay or refinance the debt? Regardless of what type of loan you are looking at, most lenders these days are charging 'exit fees', also known as 'deferred establishment fees' or DEF. The fee can range from a fixed price within a certain timeframe, to diminishing fees over time ($1500 in the first year, $1200 in second year, $1000 in third year) or even a percentage of the loan amount, which is common for the non-bank lenders. A percentage can often be the harshest fee. E.g. $300 000 loan x 1% exit fee = $3000. It is obviously best to get a loan without an exit fee. There are not many around – but there is still a few very strong products without exit fees. If you are absolutely certain that you will not be selling or refinancing within the next 4 years then an exit fee is not much of a concern – but are you certain?
2. Will I be able to make extra repayments?
Extra repayments can greatly reduce interest on your home loan, and therefore help you pay your debt off faster. An extra $20 per week on a $350 000 loan will save you 3.5 years! If you think you will be able to manage extra repayments, it is important that you find a loan that allows unlimited extra repayments. If you are looking at a fixed rate loan, try and work out how much extra you will be paying every year. Some fixed rate loans don’t allow any extra repayments, while some allow up to $15 000 per annum.
3. Fixed or Variable?
It's difficult to say what the rates are going to do in the future, but here are some pros and con’s of each.
Fixed – Pro’s:
- Repayment will not move during the loan rate (great for those who would struggle with repayments in the event of a rate rise)
- Interest saving if the rates go up
Fixed – Con’s:
- Limited to the extra you can pay into your loan each year
- ‘Break Fee’ to get out of a fixed rate loan can be quite high (this includes if you want to refinance or get a loan increase)
- May miss out on lower rates if they drop
The most important thing to consider when looking at fixing, it how long you plan to keep the property for and whether it’s likely that you will need to borrow against the property in the near future. If you feel that you will need to alter the loan at all within the fixed term, you should either consider a reduced fixed term, or reconsider fixed rates at all!
4. Future Intentions:
Are you planning on investing (property, shares etc) over the next three years?
If so it’s important that you are set up with a lending facility that will fit in with your investment needs in the future.
We recommend that you discuss your thoughts on the above questions with your finance broker.
posted by Daniel Serratore @ 4:17 pm,
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The Author
Daniel Serratore
Daniel is heading up the new generation of Finance Brokers in Sydney. With his fresh approach and "can do" attitude, Daniel has developed relationships with key people within the Sydney lending market which enables him to source great deals for his clients. Daniel is big on customer service and has built his business purely by referrals from clients and other businesses. You can catch him via the email link on the top of this page
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This blog was developed as a resource for our clients and the general public. Although the internet will provide you with many lending providers, I am still to find a resource that shares ideas, tips and general useful info to assist borrowers make the right decisions. Hence this blog was born!
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