The basics: How do home loans work?

Home loans, also commonly known as mortgages, allow buyers to purchase a property by taking out a loan which funds their new home. Home loans are specifically designed for buying real estate, but they share many similarities with other types of loans. One of those similarities is that the person taking out the home loan will borrow a certain amount, and pay back an agreed rate of interest over a few years. Home loans offer the advantage of offering property buyers a cash injection to fund a large real estate purchase. In this article, we will look at how home loans work.

In This Guide:

Home loans: How do they work?

When you take out a home loan, you are borrowing money from the bank to fund the purchase of a property. That means the bank pays the fee to the seller, and then you agree to pay back the sum to the bank, as well as the interest which has been agreed. All the relevant terms and conditions of your home loan will be laid out in the agreement which you sign on approval of your home loan application. Usually, the maximum repayment period if 30 years. In these cases, monthly repayments are small when compared to shorter-term loans, such as car loans.

How to qualify for a home loan

Every home loan will have minimum standards which need to be met by those applying. These criteria typically include things like income requirements, a minimum credit score, and guidelines with regards to debts. A sensible first step can be to find out what the maximum value of the loan you qualify for is, and you can do this by talking to a home loans consultant, who can work out the figure based on the salary of you, and a partner, if applicable. As a general rule of thumb, you can expect an annual repayment amount to come to 30 per cent of your monthly income. Once the bond has been approved, the interest rate will be calculated based on the property's market value and the home loan size.

What are the different types of home loans?

Among the common home loan products which you can expect to see on the market are access bonds, which allow the borrower to withdraw extra money which they have paid back, should they need it; equity release bonds, which allow you to take out the money which is tied up in your home (usually if you are over 55); first time bonds, designed for those getting on the property ladder for the first time; and interest-only bonds, for which buyers are permitted to pay only the interest on their loan, rather than repaying the capital, paying off the loan once the mortgage term concludes.

Different types of home loans offer different types of interest, including capped interest, which prevents the interest from rising above a certain rate, but does allow the borrower to benefit from interest rate dips in the market; fixed interest, in which the interest rate is fixed for a set period such as one, three or five years, before reverting to the standard variable rate; reducing interest, which sees the interest rate drop as the total amount which you owe drops; and variable interest, with an unfixed interest rate that is adjusted above a certain level.

How can I get the best home loan deal?

In the digital era, there has never been a better time to find the right home loan deal for you. That's because there is a whole set of tools at your disposal, including sites such as ours which allow you to compare home loans. You'll be able to weigh up all the variables and compare the different rates to find the most affordable home loans, and the ones which are most suited to your future financial objectives. Alternatively, you could seek the professional help of a home loan consultant to help you review the home loans which are available to you, and to submit your home loan application.

Whichever route you take to finding the best home loan, remember - there is no need to rush! By taking care and consideration, you can find a deal which can help to set up your future.

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