The Difference Between a Home Loan and a Mortgage
There are several incentives designed to help first-time buyers take their first step onto the property ladder. Whether you have saved enough for a large down payment or simply wish to protect your savings, they should not be missed. But with so many home ownership schemes available, it can be difficult to decide which one is right for you. The two most common are home loans and mortgages. Continue reading to find out how they differ and how to decide which one is better suited to you and your property search.
Their purpose
The definition of a home loan and a mortgage may sound similar but they are not the same. In the simplest of terms, a mortgage is when a financial institution, such as a bank or credit union, lends money to a buyer to allow them to purchase a property. If they fail to deliver on monthly repayments, the home can be repossessed. A home loan, on the other hand, is often considered a ‘second mortgage’ and is a loan used to purchase, construct, or upgrade real estate. It is also repaid over time with added interest. Home loans can only be obtained by existing homeowners after the application of a mortgage as home equity is used as collateral. In order to assess which one is right for you, you must familiarise yourself with the purposes and benefits of each.
Interest rates
Another difference between a home loan and a mortgage is the interest rates attached to them. Interest rates can be influenced by several factors and there is no general rule. These include age, income, and credit history. However, home loans generally benefit from much lower interest rates than mortgages. This makes them more attractive and affordable to first-time buyers. Lenders usually offer either fixed or floating interest rates for home loans. Fixed-rate interest rates will remain unchanged whilst floating interest rates change in line with market fluctuations. Mortgages tend to cost more than home loans in the long run and are more likely to have a fixed interest rate. However, these are seen as higher risk than home loans. Most lenders agree that the higher the risk, the higher the interest rate. If your existing mortgage benefits from a low interest rate, a home loan may be your best option. If interest rates on your mortgage have dropped, you may benefit from a mortgage or a full mortgage refinance. A DBS Home Loan may be able to provide you with all of the tools you need to purchase your first private home, condo or flat.
Repayment period
Despite their differences, home loans and mortgages are both required to be repaid in fixed monthly instalments. Home loans can benefit from a wide range of repayment options to suit the borrower’s financial circumstances and abilities. Repayment periods for home loans tend to be longer than repayment periods for mortgages. For example, some home loan providers may be able to delay EMI, or equated monthly instalments, and only request that interest be paid in the meantime. This can alleviate the burden of costly monthly repayments but requires a secure job. Some home loan providers may also be able to offer home loans with EMI that increases or decreases in line with your expected salary. This can reduce interest rates but repayment may become difficult if work prospects dry up. The average mortgage repayment period is 25 years. Longer repayment periods require lower monthly instalments but this also extends the financial and mental burden of a mortgage for longer than may be required.
Loan-to-value ratio
One of the main differences between home loans and mortgages is the loan-to-value ratio. A loan-to-value ratio, or LTV, is how lenders assess the size of the mortgage they are willing to offer based on the value of the property. If a borrower has saved enough for a large deposit or if the home’s value has risen significantly, the borrower could be awarded a greater loan. If the loan-to-value ratio is below 80%, they are likely to be awarded the lowest possible interest rate. If the loan-to-value ratio is above 80%, they will be subjected to a much higher interest rate. The buyer may also be required to purchase private mortgage insurance, or PMI. This is usually only required if you have a low loan-to-value ratio or if your deposit is less than 20%. This is a type of insurance that protects the lender from the borrower not being able to keep up with their monthly payments. It also allows the buyer to become a homeowner sooner than they would be able to if they did not qualify for private mortgage insurance.
Deciding between a home loan and a mortgage can be difficult. By familiarising yourself with the many differences between them, you can make an informed decision.
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