A Simple Guide to Tracker Mortgage in 2022
Last updated on March 2nd, 2022
Home loans or mortgages allow borrowers to finance purchases for homes and properties. Doing this is a tad intimidating for first-timers, so here’s a home loan guide for 2022 that can help borrowers - including information on a tracker mortgage.
Home loan guide: what are the essential things to know about home loans?
Principals, interest, tracker mortgages, and more: all loans have terminologies that potential borrowers need to understand fully. The important ones for home loans include:
- Principal and repayment
The principal is the amount lent to the borrower. Paying this amount off is done gradually, with the payments subject to the interest rate.
Repayment refers to the gradual paying off of the loan. The repayments are in set intervals, determined by the agreement between the lender and borrower. These intervals stretch out over the term of the loan, commonly 30 years in Australia.
- Interest rate type
A fixed-rate loan means that the interest rate does not change throughout the term of the loan. A variable-rate loan, on the other hand, means that the rates may fluctuate over time. There’s another special type, tracker mortgage, discussed further later.
- Loan to value ratio
Borrowers need to shoulder part of the property’s total cost out-of-pocket, with the rest of the value shouldered by the lender. The ratio between the borrower’s and lender’s shouldered cost is called the loan to value ratio or LVR.
Lenders usually give lower interest rates to borrowers with a high LVR. This means that the better the LVR is, the less the borrower needs to repay over time.
- Tracker mortgage
Tracker mortgages are common in other countries but not much so in Australia as not many companies offer these. A tracker mortgage involves a variable interest rate that tracks the cash rate of the RBA and sets the interest above that level.
Home loan guide on maximising savings
There are some good practices to note when taking out a home loan from a lender. Here are some tips to maximise savings when borrowing:
- How much is the typical amount for the initial deposit?
It’s common for borrowers in Australia to have at least 10% to 20% of the total value of the property as a deposit. This leaves a good LVR further leads to more favourable interest rates.
Those interested in maximising savings should at least aim for 80% LVR. This is not just for the interest rate but also for cutting out the cost of Lenders Mortgage Insurance (LMI). Most lenders require LMI if the borrower has below 80% LVR.
- Fixed-rate or variable-rate loan? How about tracker mortgage?
Variable-rate loans are more flexible than fixed-rate loans. As a result, these can lead to more savings depending on the current market situation. Fixed-rate loans, however, come with the advantage of knowing definite costs for repayments.
Both can work but do note that some lenders will limit the features that are attached to each loan type. For example, unlimited repayments are usually available with variable-rate loans. On the other hand, extra repayments in fixed-rate loans may come at an additional cost.
Tracker mortgages may also work. This is because not all lenders vary their interest rates even with variable-rate loans. With a tracker mortgage, borrowers have assured constant and instantaneous tracking of the RBA’s rates when it fluctuates.
- Interest-only repayment or principal + interest repayment?
Interest-only repayments require the borrower to pay only the interest for a set period of repayments. The principal is paid off after the initial repayment period. On the other hand, the principal and interest repayments involve paying off both simultaneously, even at the beginning of the repayment period.
Generally, principal and interest repayments lead to more savings. However, those who cannot immediately afford the principal repayments can go for an interest-only repayment.
Also, interest-only repayments are sometimes favourable from a taxation standpoint. This is because interest payments are deductible from taxes.
Compare Home Loans with an Online Comparison Tool
Are you aiming to borrow money to finance a home purchase? A home loan guide can only do so much. It’s still best to compare multiple offers before you take out a loan. A comparison site like Makes Cents can help – compare offers today to keep borrowing costs down.
References:
https://www.investopedia.com/terms/p/principal.asp
https://insurancecouncil.com.au/articles/lenders-mortgage-insurance/
