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Voiceover: This podcast is for education and entertainment purposes. It's not financial advice and doesn't take into account your objectives, financial situation or needs. You should consider if the information in this podcast is appropriate for you and contact a professional financial adviser. If you are seeking financial advice.
Alan: Hello and welcome back to the Health Professionals Bank Bringing It Home podcast series, where we take you through the home buying process step by step from getting home ready to the home loan application process right through to the sale and settlement.
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Alan: I'm Alan Waugh from the Health Professionals Bank, and joining me again today is financial wellness and certified money coach Betsy Westcott across her extensive career in financial services. Betsy has helped hundreds of people to realise their dream of becoming home owners and investors. And her greatest wish is that every Australian enjoys financial well-being. Hello and welcome back, Betsy.
Betsy: Hi, Alan.
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Alan: Good to see you again. Now, today, we're going to discuss with you our home loan options and take you through some of the key things you need to consider when you're weighing up your loan options. But before we get started, we'd like to acknowledge the traditional custodians of country throughout Australia and their connections to land, sea and community.
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Alan: We pay our respect to the elders past and present, and extend that respect to all Aboriginal and Torres Strait Islander peoples. Now, our home loans, Betsy, there are lots of options for listeners to weigh up, isn't it?
Betsy: Absolutely. And it can be quite overwhelming. It's not every day you're signing a contract for potentially hundreds of thousands of dollars, so you really want to find the right home loan for you now and with an eye to the future.
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Betsy: So basically, there's three options when it comes to a home loan, fixed rate, a variable rate or a combination of the two split loan, understanding the pros and cons of these various options and the features of different home loans means you're going to be in a better position to choose the right loan for your needs now, but with an eye toward the future.
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Betsy: Because we all know in life things change. They don't stay the same, including interest rate fluctuations, your life circumstances and changing financial position for nurses and midwives, something that might weigh into your home loan considerations is your paying income. If you're working on a casual basis, your pay might vary from roster to roster week to week. So this can make budgeting for your home loan repayments more of a challenge with a variable rate loan, especially if those interest rates go up and your loan repayments go up with them.
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Betsy: On the flip side, if you do regular overtime or you have the option of picking up extra shifts to boost your pay, you might want some flexibility of being able to make additional repayments on your loan. All the benefits that come with having an offset or redraw facility with your home loan. And again, we'll talk more on those later.
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Alan: Look, it's great to know that there are options out there. So so Betsy, let's jump straight into fixed rate loans. Can you talk us through how they work and what are some of the pros and cons? There might be fixed rate loans?
Betsy: Yes, the interest rate you're charged on, your fixed rate loan is locked in. It's locked in at a set rate for a period of time.
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Betsy: It's often 1 to 5 years. So your loan repayments stay the same during your fixed rate term. So does it matter if those interest rates go up or down? Your loan repayment, your interest rate is locked in, which is really handy if you're on a tight budget or if you've got fixed income, you'll always know what your repayments will be for the duration of that fixed rate term.
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Betsy: And again, this can be really helpful. For example, if you're working as a casual or on contract and your salary is a little unpredictable, having the same fixed repayment amount during the fixed rate period, the fixed rate term can bring you a lot of peace of mind and also help you budget.
Alan: And what about those interest rate fluctuations that we can see when it comes to fixed rate home loans?
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Alan: Can you talk us through what listeners need to know?
Betsy: Locking in a loan at a rate with a fixed rate. They could protect you against those potential rate rises and higher loan repayments in the future. So you need to be aware, though, that the fixed rate can change right up until you sign on the dotted line. Unless your lender offers, use the opportunity to rate lock, which generally comes at a cost.
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Betsy: You might consider a fixed rate loan if interest rates are low and are likely to go up in the near future. And most lenders offer a range of options when it comes to fixing your loan, typically between one and five years when your fixed rate term expires, the rate will automatically revert to a variable rate loan. And then you generally have the option to either choose to refix that loan at the available fixed rate at the time or move on to a variable rate loan at that point in time.
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Alan: And what are some of the things our listeners should be aware of when it comes to fixed rate loans?
Betsy: Something to be mindful of is that it may not be the best choice for you. If you want flexibility to make extra repayments or to access other loan features like an offset or redraw facility. And again, we're going to get into what those are exactly saying.
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Betsy: So for example, if you're likely to increase your take home pay in the near future, such as a promotion or you will soon be paying off your hex car or personal loan or debt, or maybe you're reentering the workforce after taking care of children, then you might want the flexibility to be able to boost your loan repayments to save on interest and pay off your loan sooner.
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Betsy: Also, you won't benefit from falling interest rates during that fixed term. So if it is a time when you think interest rates might go down, you'll still pay the same right on the loan that you locked in for that whole fixed term. So when considering a fixed rate loan, just take into account whether you are likely to be in a position in the future to boost your repayments and pay off your home loan sooner, you won't get that same level of flexibility.
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Betsy: If you do that with a fixed rate loan as you would with a variable rate loan.
Alan: Alright, so I understand this a little bit better. Say I've fixed my home loan for five years, but in the third year I'm in a position to pay down my home loan or make some extra payments. I can break my fixed term early, but there are costs involved.
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Alan: Is that right?
Betsy: That is right. So you might want to break your fixed rate loan early, but you will incur costs so you can break it early for a better interest rate or to pay your loan off or to refinance with another lender, for example. But you would typically need to pay something called a break cost to compensate the lender.
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Betsy: And to find out more about break costs and how they're calculated, listeners can search for break costs on our website to bring up more information. So fixed rate loans might not be suitable for everyone, particularly if you're considering selling or making changes to your property during that fixed rate period.
Alan: Okay. And let's say, you know, you get a pay rise or you've cleared some debt and you find yourself with some extra dollars you can put towards your mortgage repayments.
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Alan: Betsy, can you talk this through what they need to be aware of there?
Betsy: So it will depend on your lender and the loan, but some lenders might not allow you to make additional repayments. Many lenders will allow you to repay more than your fixed repayment amounts per year. But unlike a variable loan, there's often a cap on how much extra you can make in repayments.
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Betsy: Another thing to consider is that fixed home loans don't typically have offset or radial facilities, so you might not be able to take advantage of the flexibility and potential savings that come with those extra features. Although Health Professionals Bank is one of the few lenders that actually offers a fixed rate home loan with an offset facility. And more on that in a moment.
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Betsy: Okay. So we've got a handle on fixed rate loans and some of the pros and cons that come with that. But the alternative is variable rate loans. Can you talk us through a little bit about that?
Betsy: Yeah, variable rate loans, they're exactly as they sound. The interest rate can vary. It can go up. It can go down over the term of your loan, which means your repayments can change too.
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Betsy: If the interest rate goes up, your repayments will also go up along with it. With a variable rate loan, they're generally a little bit more flexible than a fixed rate loan and they allow you to do things like make additional repayments, which can help you pay off your loan sooner and can also have a big impact on the amount of interest that you pay over the life of your loan.
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Betsy: Home loan variable rates can vary from lender to lender, but will certainly be influenced by the cash rate set by the Reserve Bank.
Alan: And that can be challenging for our budget.
Betsy: Yeah, it absolutely can be because your repayments can go up and down as interest rates do. So when you weigh up your home loan options, it's important to take into account future interest rate changes to make sure that you can meet your loan repayments if interest rates were to rise.
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Alan: And that brings us to the pros and cons of variable loans. Betsy why might our listeners consider a variable rate loan and what do they need to be aware of?
Betsy: So let's look at the key benefits associated with a variable rate loan. One If you want to have the flexibility to make repayments on your home loan at any time to to pay down your loan sooner and potentially save on interest over the life of the loan.
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Betsy: Three, they may come with other benefits and features such as offset and regional facilities that might not be available with a fixed rate loan. One thing, however, to be aware of with a variable rate loan, the good if rates go down, but not so much if rates go up because your repayments will go up too.
Alan: Now, you just touched on a couple of terms that our listeners are going to hear as they go through this process, offset and redraw.
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Alan: Can you talk us through a little bit of what they are?
Betsy: Yeah, that's right. So an offset account is an account that's linked to your home loan where you can park your savings without actually transferring it into your loan, whereas a redraw facility is money that you've paid directly into your home loan, but you have the option to draw back out.
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Betsy: And with both these options, they give you flexibility. They can also give you a lot of potential interest rate savings too. So you can put a lump sum such as money from a tax return into an offset account that could be very useful for reducing payments but still being able to access it in the future just in case you need it.
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Betsy: And at Health Professionals Bank, they are one of the few lenders that offer fixed rate home loans with a offset facility, isn't it, Alan? That's right. You got our your way plus fixed home loan. It's pretty unique out there in the market. It offers fixed rates with 100% offset and also the ability to pay an extra $10,000 per year on the fixed amount.
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Alan: That's something we're really proud of to offer for our members and it's a real benefit for them.
Betsy: And just a quick tip for our listeners, something that I used myself just last week. There's a great calculator on the website that you can use to help you find out how much you could save with an offset facility linked to your home loan account too.
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Betsy: So just type in offset calculator in the search bar and check that out.
Alan: Okay. So now we've covered a fixed and variable and the pros and cons and we've touched on package time lines. But Betsy, there's some other things our listeners need to know about, and that's the difference between principal and interest and interest only payments.
Betsy: Often referred to as P and I and I are so a principal and interest repayment means that you are paying back the interest on the money borrowed.
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Betsy: It's kind of like the rent of the money borrowed as well as the debt itself. The principal. So principal and interest repayment, you're paying back the debt and the interest, whereas on an interest only repayment, you're not actually paying the debt back, you're just paying the interest, the rent of the money. And that's kind of the difference.
Betsy: And that's really important for our listeners to understand that look, our listeners as well, they may have heard of things like packaged loans, which we touched on and then loans that come with sort of extra stuff.
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Betsy: So basically products and discounts and is offset and redraw facilities that we've talked about earlier. So we give listeners a bit of a snapshot of packaged home loans. Yeah, basically a packaged timeline is bundling a bunch of benefits and features together and you've listed a few of them there. It might be you pay an annual fee and you get discounts on particular things.
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Betsy: It might include your bank accounts and credit cards as well as your home loan. It's important to remember that even though you might pay an annual fee with the package timeline, you may still be better off overall when you take into account the package benefits and those discounts. So for example, the health professionals bank your way. Plus variable timeline is a package timeline that comes with a 100% offset and regional facilities and as a bonus for eligible essential workers, it comes with a 0.5% discount on the variable rate, as well as waived annual fees for first home buyers.
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Betsy: And that kind of discount can make a big difference over the life of the loan, especially when you consider lots of loan terms are as much as 30 years. But in one year alone, if you had a $600,000 home loan with a 0.5% annual fee discount, you're going to be saving $3,000 on interest alone. Pretty good.
Alan: That's very good.
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Betsy: And of course, there's terms and conditions that do apply and you can find those on the home loans page on our website. Yes. And when it comes to package home loans, it's important to weigh up not just the interest rates, but also those products and features that come bundled with the home loan and any potential savings and benefits that they might offer over the life of your loan.
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Betsy: So it's important to consider and compare loans, fees and charges.
Alan: Okay. So now we've covered both fixed and variable and their pros and cons, but some of our listeners might want the best of both worlds.
Betsy: Yeah, kind of like the taco ad. And I love those. Let's have both. So you can do that with a split loan. And this is where you choose a combination of both fixed and variable loans.
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Betsy: It gives you the flexibility of a variable loan, but also the certainty of a fixed rate home. You can generally choose to split the amount that you're most comfortable with, so it doesn't have to be 5050. You might want to go 30% variable and 70% fixed or vice versa. It can be a really great way to manage risk.
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Betsy: Like if rates look like they might rise, fixing a portion of your home loan can help protect against that, while allowing you the flexibility, for example, of being able to pay down the variable portion sooner if you're able to make extra payments. Of course, it might also mean that you can access the benefits of other loan features, such as a mortgage offset account or a regional facility linked to your variable home loan.
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Betsy: If your lender doesn't offer those facilities with your fixed rate loan.
Alan: That's great. Look, we're going to talk about investment lines in our next episode, but let's quickly look at construction loans for listeners who might be thinking about building their own homes. They work on it differently from home loans for existing properties that way.
Betsy: Yes, they are a little bit more complicated, but stick with us.
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Betsy: So construction loans have interest only payments during the construction period while you're building the home, meaning that your repayments are lower throughout this time, you also have the flexibility to draw down the loan in various stages. So these are known as progress payments and you typically have about 5 to 6 stages during the construction period, including foundations all the way through to lock up.
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Betsy: Now make sure you speak to a lending specialist. If you're looking at building your own home, they can talk you through your loan options and answer any questions you might have around construction loans and also kind of help you weigh up all the different options to find the loan that best suits you.
Alan: But again, some great tips, especially with flying through this episode.
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Alan: But just before we go, what are your top tips for listeners when it comes to weighing up the home loan options?
Betsy: I would say take the time to get to know and understand all the options that are available because you want to find what's right for you and your needs both now and into the future. And again, seek advice and guidance from a lending specialist who can help you figure out what's the best loan option for you.
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Betsy: It's really important to do your research and definitely check out that loan repayment calculator on the website that will help you work out how much your repayments are likely to be based on either a fixed or variable rate loan and the different terms. And we've said it before, but we're going to say it again. Make sure you download that copy of It's My Home and the First Home Buyers Guide from our website.
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Betsy: For more information on the topics we're covering today.
Alan: Excellent. Thank you very much again, Betsy, for joining us today.
Betsy: Thank you, Alan.
Alan: And thank you listeners for joining us, too. We hope you enjoyed today's episode of Bringing It Home podcast. On knowing your home loans. Make sure you tune in to episode five, where Betsy will be giving us the lowdown on refinancing.
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Alan: And remember, if you have any questions about the home buying process or you want to speak with one of our lending specialists, please give us a call or make a booking on our website to speak with a lending specialist at a time and place that suits you, including after hours at your place, at work, at home, or even by video.
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Alan: And as always, look forward to catching you next time.
END OF EPISODE
