Choosing the right type of home loan

To help you understand which type of home loan may be best suited to your needs, let’s take a look at the key types of home loans available and how they work.

There are hundreds of different home loans out there in the mortgage marketplace. But fundamentally, they are all based on two key things:

  • Principal – the amount of money you borrow
  • Interest – how much you pay to borrow the money. It’s calculated on the outstanding principal

 

VARIABLE RATE

This is the most popular type of home loan in Australia. The interest rate you pay may vary in line with movements in market interest rates set by the Reserve Bank of Australia. Essentially if the RBA moves the rate up or down, your lender is likely to follow suit by passing on the changes to you.

 

FIXED RATE

With this type of home loan the rate you pay – and the home loan repayments, are fixed for a set period, usually between one and five years. This makes it easier to budget for repayments and you are protected from increases in market interest rates. The downside is that if rates fall, you could end up paying more than necessary.

 

SPLIT RATE

As for how much money you can borrow, you could borrow in a similar credit limit range as you would with an unsecured personal loan. For example, a Westpac Flexi Loan (Westpac’s line of credit) gives you $4,000 to $50,000. If you need more than this to buy a car, keep in mind that a secured car loan may give you up to around $100,000 and potentially a lower rate, too.

 

INTEREST ONLY

When borrowing money from a lender or bank, you can choose to pay just the interest on the loan or both the interest and the principal (the actual amount borrowed). If you choose to pay only the interest on the loan, your repayments will be much lower freeing up cash for things like renovations and other expenses.

However, a lender or bank will always assess your ability to pay back both interest and principle in order to qualify for the loan as interest-only loans have a limited life span of up to 5 years.

 

INTRODUCTORY (A.K.A HONEYMOON)

The interest rate is usually low to attract borrowers. Also known as a honeymoon rate, this rate generally lasts only for around 12 months before it rises. Rates can be fixed or capped. Most revert to the standard rates at the end of the honeymoon period.

Pros:
– Usually the lowest available rates
– When payments are made at the introductory rate, the principal can be reduced quickly
– Some lenders provide an offset account against these loans

Cons:
– Payments usually increase after the introductory period

 

LIMITED GUARANTOR

A limited guarantor loan or an equity guarantee is a loan that allows family members to assist you with your loan, by guaranteeing a part of your loan. Family members ‘pledge’ to aid the borrower and will act as a guarantor for your loan, providing extra security or by assisting with repayments.

 

CONSTRUCTION (A.K.A BUILDING LOAN)

A construction loan is a specialised loan that helps you meet the unique needs of ongoing payments throughout the contruction process. The key difference between a construction loan and a regular home loan is that it allows you to draw down on the loan balance, whilst a traditional home loan is made available in one lump sum to the borrower.

 

BRIDGING

If you are buying a new property whilst you are still looking to sell your existing property, you might want to look into something called a bridging loan.  A bridging loan is a short term loan that gives you up to 6 months to sell the existing property, helping you navigate this awkward time as you transition to your new home.

 

LINE OF CREDIT

Once you have owned a property for a while and you have built up some equity by making repayments, you can then apply for a loan called a line of credit. This type of loan allows you to access the funds whenever it is needed.

This product is a handy and creative way to manage your cash as the money can be used for virtually anything and paid back on your terms.

As long you have more cash coming in than going out these accounts can be useful. However, they can be very costly if the balance of the line of credit is not regularly reduced as it can have higher interest rates and reduce the equity in your home.

 

LOW DOC

As the name suggests, a low-doc loan is a loan suited to borrowers who may find it difficult to provide the paperwork needed for a traditional home loan. This type of loan usually appeals to investors and people who are self-employed as lenders will use other sources of documentation to consider your suitability for a loan.

 

NON CONFORMING

Some people with a poor credit rating may struggle to be approved for a traditional home loan from as they are perceived as a greater risk to the lender. But not all is lost, as a non-conforming loan allows these people to secure a loan as lenders can use other evidence of your ability to repay a loan. A larger deposit is often needed as a sign that you are able to repay the loan and a higher interest rate is needed to offset the risk for the lender.

 

From here, there is a wide variety of home loan features and structures to choose from. Take a look at our recent blog post explaining the different Home Loan Features & Options available.

Navigating a path through the mortgage maze can seem confusing – especially with so much choice available. So it’s good to know that your Mortgage Broker can streamline the process for you. We listen to your needs, then – using unique software, we compare hundreds of home loans to find the deal that’s right for you. It’s worth knowing what’s involved with each to make an informed decision, and we’ll help you every step of the way.