What Is Home Loan For?

Home Loan is Not For the Car

and Boat

Obtaining a home loan is a very significant decision in any person’s life. There are many different loans available and choosing the correct loan product should be taken very seriously. One person may prefer a fixed interest rate loan to lock in a cheap interest rate or to have the security of a known cost for budgeting purposes. Another person may prefer an interest only loan because they have the cash flow to pay it down quickly. Another mortgage product is a discounted variable interest rate loan where the interest rate is lower than the average rate available at any time but because the rate is variable it is likely to be adjusted in line with market interest rate movements.

In making a decision about the loan that suits your purposes it is best to realise that unforeseen events can happen. Therefore it is best to consider loans that do not incur large fees if you want to refinance or if you want to make payments in addition to those required by the lender. 30 years is a long time and there may well come a time when you wish to finance an extension to your home, access the equity from your home to purchase an investment property, purchase a business or invest in some other opportunity. It is best to consider loans that have the flexibility to support these decisions rather penalising you for them. It is not always best to obtain a loan which is the cheapest loan available. In many cases cheaper loans come with restrictive conditions which incur fees if you want to change them. If you want to refinance to a more suitable loan this can be difficult if you chose the original cheap loan because it was cheap and it appealed because you were short of cash. If you have been short of cash and encountered difficulties which adversely affected your credit score then it can be difficult to refinance into a more flexible loan later on which may be more suitable to your needs.

If you are considering a refinance to release some equity from your home, it is best to do this to purchase some that is going to appreciate such as an investment property or a business. It is not wise to use the equity in your home to purchase items that will depreciate such as cars, boats, bikes or holidays. A home loan may appear to be a cheap option for purchasing such items. However, this is not the case. Over the life of a 30 loan you will pay as much in interest for these items as the original purchase price for them so they become very expensive. Also, don’t use all the equity in your home for one investment because if the investment does not perform as planned you will be sorry.

And finally, make sure that any loan you are committing is comfortably within the ability of your income to repay.

By James H Bridgman