First Home Buyers
The NSW government announced several reforms from 1 July, 2017 to improve housing affordability for first home buyers. This included removing stamp duty for homes up to $650,000 and insurance duty on lender’s mortgage insurance, reducing stamp duty on homes up to $800,000, and introducing the First Home Owner Grant (New Homes) for first home buyers.
The grant amount is determined by the date of the contract to purchase or build a new home, for those eligible. The First Home Owner Grant Cap for new home purchases is $600,000, and if you are entering a contract to build or are an owner-builder, the total value cannot exceed $750,000. For eligible purchases made on or after 1 January 2016, the grant amount is $10,000, and for those made between 1 October 2012 and 31 December 2015, the grant amount is $15,000.
Different Types of Home Loans
Fixed Rate Loan
A fixed rate loan has an interest rate that is “fixed” for a set period of time (typically 1-5 years). In that time your interest rate will not fluctuate and you can budget according to your set repayments, but if you decide to switch loans before the end of the fixed term, you’ll have to pay a “break fee”. Overall, fixed loans are great for borrowers who are on a budget and prefer not to deal with variations in interest rates.
Principal and Interest Home Loans
Principal and interest loans require you to pay off the amount borrowed (principal) and the interest incurred on this amount at the same time. Because you’re paying off the principal loan amount and the interest with each minimum repayment, the amount you pay will keep decreasing over the life of the loan. The lender will determine the minimum repayments needed to repay the loan within a specified term – usually no longer than 30 years.
For self-employed people or freelancers that do not have the typical financial documents proving a source of regular income, low-doc loans are a fantastic option. They can be fixed or variable, but their rates are generally higher. If your repayments are on time, these rates can be reduced after a few years. Many lenders tend to treat self-employed borrowers the same as traditional borrowers these days as long as they can provide good records for personal income.
Interest-only loans require you to only pay off the interest that would be incurred on your loan, in the short-term; usually only for seven years. You’ll have to start paying off the usual principal (and interest) after this period. Interest-only loans are a popular option for those with a low budget and investors looking for negative gearing or to make a profit by reselling their investment property.
Variable rate loans have interest rates that will fluctuate throughout the lifetime of the loan depending on your bank or cash rate decisions made by the Reserve Bank. Variable rate loans offer more flexibility than fixed rate loans; you have to make your minimum monthly repayments, but most institutions allow you to pay more on top of that. There is no break fee if you decide to switch loans but you will still have to pay a discharge fee.
- Standard variable loans allow you to make extra repayments, redraw extra repayments previously made, or use an offset account to reduce the interest on your home loan.
- Basic variable loans are a “no frills” option with lower interest rates and no extra features. Depending on the institution, you may still find a basic option that has some of these additional features available.
Line of Credit
Lines of credit (or equity lines) allow you to access additional funds by drawing on the equity value of your home. If the value of your home has appreciated and you are in need of additional funds, a line of credit loan can be a great option. However, it should be considered that using the equity built up on your home will likely delay the time it takes for you to own your home. Since you have virtually unlimited access to your funds, this type of loan is only a good idea if you are disciplined in managing your finances. Nonetheless, if a line of credit loan is used for property investment with good returns can increase your net wealth.