5 Most Common Types of Home Loans Explained

As a new home buyer, learning the ins and outs of the real estate business and the market for property in your area is hard enough. Plus, there are many different types of home loans available, each of which presents buyers with its own special sets of features and options:

  1. Fixed Rate Loan A fixed interest rate mortgage guarantees borrowers a set interest rate determined by the Reserve Bank of Australia‘s Cash Rate. It is locked for a prescribed number of years (usually 1-5). At that point, the loan either rolls over to a variable interest rate or resets at current market rates
  2. Variable Interest Rate Loan In this type of loan, lenders alter the interest rate borrowers pay according to the market in any given month or year, according to the Reserve Bank of Australia’s Cash Rate for that period. Because there is no way to predict the ebbs and flows of the market, lenders offer borrowers a discount on the reported RBA rate that ranges from 0.1 to 0.7%.
  3. Building & Construction Loan This loan is usually set exactly as a fixed or variable rate mortgage with the major difference being that borrowers draw down the loan amount in stages, as construction progresses on their home.
  4. Honeymoon Loan Also called an ‘Introductory Rate’ loan, this loan type mirrors the variable rate loan, however, lenders offer borrowers a special ‘introductory’ interest rate that is discounted from the standard variable rate. This rate lasts for a set period of time (usually 6 months to 3 years) and then resets to an agreed upon interest rate that is generally a bit above the standard variable rate.
  5. Split Loans Any loan that combines the aspects of the above loan types is a split loan. This is usually an individually-designed and tailored package set between the lending institution and the borrower and negotiated by both parties.

 

Hopefully, this breakdown is a good first step in learning about the home loan options available for you. As step 2, we have compiled an excellent resource, the Home Loan Starter Kit which helps you get these facts straight and move forward in the home loan process with confidence. It’s a FREE download full of great information; go get yours today.