Types of Home Loans
We’re Here to Make It Easy to Choose the Home Loan That’s Right for You
What to consider when choosing a mortgage?
When comparing the different type of home loan products in the market place, it is important to look further than the interest rate. You should also consider the various features offered by different home loans and look at how they would benefit you and fit with your current and future plans.
There are so many things to consider when choosing the right loan product to meet your needs. Variable or fixed rate? Would I benefit from a redraw facility and an offset account? Will I need to pay lenders mortgage insurance?
With so much to think about it is important to speak with an expert who can assist you by not only answering important questions but by providing options that best suit your requirements.
Basic Variable Home Loan
Basic variable rate loans typically offer lower interest rates and fewer features when compared to standard variable rate loans. Interest rates and loan repayments generally vary throughout the term of the loan. You often have the option to pay for additional features.
- Relatively low interest rates
- Lower repayments
- Redraw facility often provided
- Extra repayments allowed
- Many basic variable rate loans do not offer the same flexibility or features as other variable loans
- Generally, don’t have an offset account
Standard Variable Rate Home Loan
Standard variable rate loans are Australia’s most popular type of home loan.
Variable rate loans generally offer:
- excellent flexibility
- low fees
- and features such as a redraw facility, offset facility, no limits on the amount of additional repayments and in most cases no early pay out fees.
The interest rate for variable rate loans varies throughout the loan term.
- If interest rates fall, your repayments will fall
- You can make extra repayments and pay your loan off sooner
- Features such as redraw and an offset account
- If interest rates rise, your repayment will rise
Fixed Rate Home Loan
A fixed rate home loan is a loan where the interest rate is guaranteed to remain the same during an initial fixed rate term. Traditionally lenders offer terms between 1 and 5 years for fixed rates, however some lenders may offer terms up to 10 years. This type of loan gives you the certainty of knowing exactly what your monthly repayments will be and peace of mind knowing your repayments won’t rise during the fixed rate term. However, you won’t benefit if rates go down during the fixed term.
- Guaranteed rate during the fixed rate period, if interest rates rise your repayments wont
- You know exactly how much you will be spending on your mortgage each month, so budgeting for other expenses is far easier
- Reduced flexibility
- Extra repayments may incur a fee or be limited
- If interest rates drop your rate will remain the same
- There are usually exit fees and break costs if you wish to end the loan during the fixed rate period
Line of Credit
A line of credit loan provides you with access to the equity in your home or investment property up to a pre-approved limit. You can access funds as you need to and use them for things like renovations, investments or other personal purchases. The interest rate on a line of credit is usually a variable rate and repayments are interest only.
- You can use the money when you need it and pay it back when you can
- You only pay interest on what you use
- Provides you with a financial buffer
- The interest rates are generally lower than a credit card or personal loan
- You have to be disciplined. You need to make sure you pay off the principle as well as the interest so that your loan reduces over time
With a split rate loan, you get the best of both worlds. You can choose to make part of your home loan a variable rate and part a fixed rate and you can decide how much you allocate to each. When deciding the split, the key consideration generally comes down to the amount of risk you want to take on interest rates going up or down. You also need to consider your budget.
- Flexibility – you can choose which portion you would like to fix and which portion you would like to be on variable terms
- Competitive interest rates over a variety of fixed and variable loan types
- The variable rate portion gives you repayment flexibility and in most cases features like an offset account and redraw
- The fixed rate portion offers you interest rate and repayment security and peace of mind
- You still benefit from interest rate drops on the variable portion
- There are usually exit fees and break costs if you wish to break the fixed loan during the fixed rate period
- By splitting your loan, you limit the benefit in reduced repayments in the event of interest rate reductions
Guarantor Home Loans
Guarantor loans are a type of mortgage where a family member will use the equity they have in their property as additional security against your loan. Guarantor loans are extremely popular with first home buyers who are struggling to save a deposit or are unable to get a loan themselves but they are certainly not limited to this type of lender.
- No deposit required. If your guarantor has enough equity in their property you won’t have to pay a deposit meaning you can borrow 100% of the purchase price
- You won’t have to pay lenders mortgage insurance potentially saving you thousands. With another property put up as additional security, the lender considers your loan of a lower risk and therefore you will not be required to have mortgage insurance
- You can remove the guarantee. Once you have enough equity in your home you can remove the guarantee so your guarantor no longer has any responsibility for your property
- The person or persons who go guarantor are liable in the event that you default on your loan and put their property at risk
A construction loan may be most suitable if you are building your own home or investment property. Construction loans are usually interest only for the period of building and then become principle and interest once building is complete. Subject to negotiation, the interest only term can be continued. With a construction loan, your monthly repayments increase as money is drawn at each building stage to pay the builder. Along with the necessary documents that are required when applying for a loan, construction loans also require a fixed priced building contract, building specifications and council approved plans.
- Interest only repayments during the building period
- Competitive variable interest rates
- Some lenders will charge you a fee every time you draw money during the building period
- Construction loans require a fixed price building contract leaving little room for changes whilst building
- Given the loan is a variable rate loan, repayments may increase if interest rates go up
If you would like to buy or build a new home before selling your old one, bridging finance could provide the funds you need to secure your new home. Bridging finance allows you to use the equity in your existing home to finance your new one.
- Purchase or build a new home even if you haven’t settled on your existing property
- No need to rent – you can stay in your existing home until your new home is ready to move in to
- Choose between principle and interest or interest only repayments
- Use the proceeds from the sale of your home to reduce the balance of your bridging loan following settlement
- Bridging loans typically don’t have the same features or flexibility as other variable rate loans
- Taking out another debt in addition to an existing mortgage means you will have additional interest repayments costs
- You may overestimate the likely sale price of your existing property and therefore fall short of the amount required to pay down the bridging loan
- The main risk is that your existing property doesn’t sell with the bridging period which may result in an increase to the interest charges on your loans.