What is a basic home loan?

A basic home loan does exactly what it says on the tin – it’s where you borrow money to buy a property. Basic home loans are popular with some borrowers as they often have lower interest rates and fees than other options. However, basic home loans may not offer the popular features and benefits that could deliver extra value to some mortgage holders.

What are the home loan basics? 

While every home loan is different, most mortgage offers share the following basic components:

• The principal: This is the loan amount that you borrow.
• The interest rate: This indicates how much extra you’ll be charged on each repayment.
• The loan term: How long you plan to take to pay back the principal, plus interest charges.
• The repayment frequency: How regularly you’ll be making repayments; typically monthly, fortnightly, or weekly.
• Fees and charges: Your mortgage lender may charge upfront and/or ongoing fees for providing a home loan.

Why do people choose basic home loans?

Basic home loans are often some of the more affordable mortgage options on the market. Generally, the more features and benefits a lender offers, the more they may charge in interest and/or fees for their home loans.

Borrowers with stretched budgets may consider a basic home loan to help keep their mortgage costs down, both from month to month and over the longer term.

What could you miss out on with a basic home?

Basic home loans are less likely to include the “bells and whistles” that are featured with some other mortgage options. There are a wide variety of home loan features and benefits, though some of the popular options include:

• Extra repayments: Being able to pay extra money onto your home loan can help you lower your mortgage principal, bringing you closer to paying off your property sooner and potentially paying less interest.
• Redraw facility: A flexible option to take extra repayments you’ve previously made onto your home loan back out of the mortgage, which can be handy when you need to access extra cash to cover an unexpected expense.
• Offset account: A transaction account that’s linked to your mortgage, where any money you deposit is used to “offset” your mortgage principal, so you’re charged less interest. For example, if you had a $500,000 mortgage and $20,000 in your offset account, you’ll be charged interest as if you only owed $480,000. You can deposit and withdraw money to and from your offset account just like a typical bank account.

Each of these features and benefits can offer extra value to some mortgage holders, by helping them pay off their loan faster and/or save money on interest charges. However, as home loans with lots of special features may charge higher interest rates and fees to begin with, you may sometimes be better off choosing a more basic home loan with fewer features and lower costs.

Before selecting a mortgage deal, it’s important to compare home loans and consider which options may best suit your personal financial situation. If you’re unsure of the best home loan choice for you, you could contact a mortgage broker for more advice.

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