Congratulations! You’ve planned and saved and are now ready to purchase property. Of course you’ll need financing – but do you know what to ask for and what the best choice for you is? Most people start by applying for a home loan or mortgage. Did you know that these are two separate things entirely? Your first priority should be to understand the difference between what a home loan has to offer in comparison to a mortgage. Meet Bob. Bob wants to buy a house, so he visits a Bank and applies for a home loan, which the Bank approves. Bob is the debtor, the Bank is the creditor and the loan amount is the principal. Bob will pay back the principal plus interest over time. The monthly repayment will be decided at the outset and may or may not stay the same over time (depending on whether the interest rate is fixed or variable). Should Bob fail to make payments, the house will be foreclosed on and the bank will sell it to recover costs. Now meet Andy. He’s found the perfect home and applied for a mortgage loan from the Bank, directly tied to the property. The home belongs to Bob, in exchange for monthly repayments (depending on interest). If he fails to make payments, foreclosure will also occur. While mortgages and home loans both use property as collateral and making payments over time, that’s where the similarities end. Mortgages act as security instruments, are less risky, and allow a larger amount offered over a longer term. On the other hand, a home loan could be secured or unsecured with a higher risk, meaning that a smaller amount will be offered, at a higher interest rate and over a shorter term. So how can you choose which is best for you? It will depend on how much you need to borrow, what you can afford to repay monthly, your deposit size, income and credit rating. No two people are alike so you’ll need to work with a good home loan or mortgage broker to analyse your needs and guide you. Take your time and don’t rush the process, and you’ll be able to make the right choice.

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