There are several different ways to make repayments on your home loan. It may be that you choose more than one option so that you can get the maximum flexibility from your home loan.
Regular Principle & Interest Repayments (Table Loan)
If you need certainty and affordability with your loan repayments you could have a fixed rate loan where the repayments are the same each month. If you are young and just starting out, you may want to start with a 25 or 30 year term to keep payments low. Conversely if rates drop you could keep payments at the same level which will mean you will pay more principle.
By increasing your regular repayments by even a small amount, you can reduce the term of the loan and the total amount of interest you pay.
Interest Only Payments
This type of loan is often used when you want to reduce the amount of your regular loan repayment to the absolute minimum by removing the need to pay principal. The amount of the principal that you owe at the end of the loan term will be the same as at the start. You normally need to have at least 20% equity to qualify for this type of repayment structure. It’s typically used by property investors to help cash flow.
Lump Sum Repayments
Technically you can make lump sum payments any time on a home loan. If you are in a fixed rate, the bank reserves the right to charge a break cost and/or admin fee for doing this. If you have a floating or revolving credit facility, there is usually no charge for lump sum payments. Some banks will allow a certain percentage of lump sum payments per annum without penalty.
If your income stays constant and you want surety of payments, then having most or all of your loans on fixed is a good idea. If you are likely to have bonus payments or surplus income, then having some of the loan on floating is a good idea.
If you have all your loans on fixed, you can always make lump sum payments on a loan when the fixed rate expires, then re fix a new term. You can also fix a floating loan at any time.
Often a repayment holiday is carefully approved by the bank on a case by case basis and usually only to borrowers who have 20% or more equity. The normal term is 3 months and you are limited by how many and how often you can request it.
Instead of paying your regular monthly repayments the lender will capitalise missed payments (of principal and interest) during the ‘holiday’ back into the loan using up some of your equity.
One option is if you create a buffer between your loan limit and your loan balance you may be able to take an interest payment holiday or re-draw funds. To create this buffer on a standard reducing loan you must have made extra lump sum repayments early in the mortgage period. Not all banks can facilitate this option.
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