Types of home loans: Which is best for your needs?
Which is the right type of home loan for you? If this is a question you are mulling over, that's good, because choosing a home loan could be one of the most important financial decisions which you make in your life. In South Africa, there are several types of home loan to choose from, and the most important variable can be the type of interest rate arrangement which you choose. In this article, we go through some of the most common types of home loan, and discuss which ones could best suit your requirements.
In This Guide:
- Fixed-rate home loan
- Capped rate home loan
- Variable home loan
- First-time buyers home loan
- Compare home loans today
Fixed-rate home loan
Under the terms of a fixed-rate home loan, you will have an interest rate which is fixed for a set period - usually one or two years. While the fixed rate which is set is higher than the base home rate, you have the advantage of being protected against a scenario of increasing rates. If you are worried about a financial outlook which could bring about increased interest rates in the future, a fixed-rate home loan allows you to guard against this eventuality. However, it should be noted that if the interest rates go the other way, and drop, you won't be able to reap the benefits, as the interest rate you will pay remains fixed.
Capped rate home loan
Traditionally one of the hardest home loans to qualify for, capped rate home loans also offer you the benefit of protection against variable interest rates, but they don't lock you into a fixed rate. Capped rate home loans are designed to offer security against interest rate increases, but because of their flexibility, they are not easy to come by. If your financial affairs are in excellent order, you have a relatively high income, and your credit score is good, a capped rate home loan could represent a good solution. They offer a 'best of both worlds' arrangement, offering a degree of flexibility and security at the same time. One downside is a rate which is typically higher than the average variable interest rate for home loans.
Variable home loan
With a variable home loan, your interest rate is attached to the base home loan rate. The base rate goes up and down, and could be volatile at times. That means if the home loan base rate goes down, you reap the rewards, as so will your interest rate. However, should it shoot up, your interest rate will too. So a variable home loan, naturally, can be suitable in an environment where interest rates are falling. This type of a loan can also be a good option for those who plan to sell their home after a few years. In this scenario, they carry less risk, because if you keep a home loan for a long time, there can be more chance of interest rates fluctuating. But you should be aware that a variable loan can mean budgeting becomes harder, as your repayment amount might vary each month according to the base home loan rate. This could lead to a stressful situation if interest rates do not go your way.
First-time buyers home loan
For those who want to get on the property ladder for the first time, but are struggling to gather enough funds for a deposit, a first-time buyers home loan can make sense. Some lenders can offer you more than 100 per cent of the purchase price value. They might also be able to cover transfer costs and registration fees. If you feel that you have a stable future financial outlook and a regular income which will make repayment straight forward, you might want to take the opportunity that a first-time buyers home loan offers to get yourself on the property ladder. However, there are potential downsides to consider, such as the fact you might not have many options with regard to the type of interest rate arrangement you have, and could also be subject to price restrictions.
Compare home loans today
As you can see, there are many pros and cons to weigh up when deciding on the most affordable home loan for you. After you have settled on the right one, use a home loan comparison website like Money Expert to find the best rates on the market.