Feb 162011
| TYPE OF MORTGAGE | Fixed Rate Mortgage |
| DESCRIPTION | Like the name implies, a Fixed Rate Mortgage maintains the same interest rate throughout the entire life of the loan. You can get this fixed rate mortgage usually in 10, 15, or 30 year terms and the time can be negotiable with your specific lender to fit your needs. For residential properties, loans are readily available in 15 and 30-year terms. Loans for commercial spaces usually do not exceed 15-year terms; five- and 10-year terms are most common. |
| ADVANTAGES | - Fixed Monthly payments – This type of mortgage is good for the home buyer who wishes to know how much the house payment will be every month – Allows more precise budgeting even in times of economic uncertainty – Repayments are not affected by interest rate rises |
| DISADVANTAGES | - Repayments do not fall if rates fall – Allows only limited additional payments – Penalties for early payout of the loan |
| TYPE OF MORTGAGE | Variable Rate Mortgage or Adjustable Rate Mortgage (ARM) |
| DESCRIPTION | The rate charged on a variable loan moves up or down in accordance with movements in interest rates as set by the Reserve Bank. |
| ADVANTAGES | - Repayments fall when official interest rates fall – Offers flexibility and additional features, such as the ability to make additional payments as well as a redraw facility which allows one to take out any extra money that one has put in – Allows careful borrowers to pay off the mortgage quickly by not having any penalty for advance payouts |
| DISADVANTAGES | - Repayments rise when official interest rates rise – Higher interest rate than a basic loan is charged as variable loans usually offer additional features |
| TYPE OF MORTGAGE | Split Rate Mortgage or Hybrid ARM |
| DESCRIPTION | A split rate mortgage has one portion of the loan fixed and one portion variable and the lender can select how much to allocate to each provided it meets lenders policy. |
| ADVANTAGES | - Fixing portion of your loan can protect you against future interest rate rises – Provides more certainty in budgeting than full variable mortgages – A lender can make additional payments on the variable portion of the mortgage – Enables you to have a fully featured home loan by combining multiple splits together |
| DISADVANTAGES | - Leaving part of your loan at a variable interest rate allows you to benefit with a lower rate if interest rate falls – Allows limited additional payments only |
| TYPE OF MORTGAGE | Interest-Only Mortgage |
| DESCRIPTION | An interest-only mortgage is where the borrower initially only pays back the interest on the mortgage and the capital is not paid back until the end of the mortgage term. The idea of this mortgage is to pay the interest owed to the lender and save the capital repayments by investing them elsewhere. This makes it possible for the lender to save by investing capital that would otherwise be paid straight back to the mortgage lender. At the end of the interest only period – usually one to five years – the borrower must start making Principal and Interest Repayments over the remaining term of the loan. |
| ADVANTAGES | - Lower repayments initially as only the interest needs to be repaid and so you have more money to renovate/improve the property. – Cuts the cost of buying a residential investment property in the short-term, which could allow you to make greater contributions to your principal place of residence. |
| DISADVANTAGES | - There will be sudden increase in repayments at the end of the Interest Only period when the loan converts to Principal and Interest repayments. – Lenders will assess your ability to repay the loan only on the principal and interest repayments. This can reduce your borrowing power, as these repayments will be higher than a loan on Principal and Interest for the full term. |
| TYPE OF MORTGAGE | Introductory Mortgage |
| DESCRIPTION | The interest rate is usually low to attract borrowers and this is also known as a ‘honeymoon rate’. This rate generally lasts only for around 12 months before it rises. Rates can be fixed or capped and most of these mortgages revert to the standard rates at the end of the honeymoon period. |
| ADVANTAGES | - This type of mortgage usually offers the lowest available rates – When payments are made at the introductory rate, the principal can be reduced quickly – Some lenders provide an offset account against these loans |
| DISADVANTAGES | - Repayments usually increase after the introductory period |
| TYPE OF MORTGAGE | Two Step Mortgage – 10/1 Year Adjustable Rate Mortgage (ARM) |
| DESCRIPTION | With this mortgage, the interest rate remains the same for 10 years and then starting the 11th year changes every year according to the index the lender chooses to base the interest on. |
| ADVANTAGES | - This mortgage is good for those who may move in 10 years and want to enjoy a stable payment plan while they are living in the home. |
| DISADVANTAGES | - Repayments usually increase after the 10 year period has passed |
| TYPE OF MORTGAGE | Balloon Mortgage |
| DESCRIPTION | A balloon mortgage works like a fixed-rate mortgage, except for a much shorter term, with lower monthly payments, and a large “balloon payment” at the end of the loan’s term. Taking on a balloon mortgage can be a risky proposition as it assumes that you will sell or refinance your property in terms that allow you to cover the balloon payment. |
| ADVANTAGES | - For disciplined borrowers that intend to sell the home or refinance before the balloon payment is due, this loan is beneficial as it allows the borrower to get more home for their money since the monthly payments are lower than a typical fixed-rate mortgage. |
| DISADVANTAGES | - Homeowners that cannot afford the balloon payment can run into trouble, especially if the loan requires them to refinance the payment through the original lender. This refinance is often at rates higher than from another lender. |
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