What type of home loan would suit me?
When selecting a home loan, it’s important to consider what your individual needs not just the interest rate. Fortunately you have a wide range of homes loans to choose from and all with different interest rates, product features and fee’s. It pays to shop around and find the right loan that suits your needs and circumstances.
The better the fit – the happier you will be and it could also result in more savings over the life of the loan.
Some features you should consider include:
- Should I split my home loan – for example my home loan amount is $300,000 and I would like 1 portion of $150,000 fixed and another $150,000 portion variable
- Ability to make additional repayments above my interest
- An offset account or a redraw facility
- Linked savings account or credit card facility
What types of home loans are available?
Standard Variable Loan
Standard variable loans are Australia’s most popular type of home loan. The interest rate varies throughout the loan term. These loans generally offer excellent flexibility, low fees and often offer great features such as an offset facility, redraw facility, no limits on additional repayments and in most cases, no early pay-out penalties.
Advantages:
- Flexibility
- Lump-sum payments can be made without incurring a penalty.
- If interest rates fall, your repayments will fall.
- Often offer extra features.
Disadvantages:
- If interest rates rise your repayments will rise.
Basic Variable Loan
Basic variable loans typically offer lower interest rates and fewer features than the standard variable loans. You often have the option to pay for any additional feature required. Interest rates and repayments will vary throughout the loan term.
Advantages:
- Relatively lower interest rate
- Lower repayments
Disadvantages:
- Many of these loans do not have the same features or flexibility as other variable loans
Intro Rate "Honeymoon" Loan
An introductory rate loan generally offers a guaranteed low rate for an initial period of time (usually 12 months) after which most will revert to the standard variable rate. The rate can be fixed or variable.
Advantages
- Usually the lowest rates on the market
- Some lenders provide offset accounts on these loans
- Opportunity to reduce the principal quickly during the ‘honeymoon’ period
Disadvantages:
- Payments will increase after initial introductory/’honeymoon’ period
Fixed Rate Loan
Under a fixed rate loan, the interest rate is fixed for a specified period, usually between one and five years. This loan gives you the certainty of knowing exactly what your monthly repayments will be and peace of mind knowing the repayments won’t rise. However you won’t benefit if rates go down during the fixed term.
Advantages:
- Guaranteed rate, if interest rates rise your repayments won’t.
- Budgeting is made easier as your home loan repayments don’t change for the fixed rate period
- Reduced risk of defaulting on your mortgage repayments should the interest rates rise
Disadvantages:
- Reduced flexibility
- Extra repayments may incur a fee or be limited
- In some cases the fixed rate can be higher than variable interest rates of the time
- depending on the lender and product you could potentially be charged a fee for exiting the fixed rate before the fixed expiry ends depending on the lender
Bridging home loan
A bridging home loan is a loan that it used if you are selling your owner occupied home to purchase a new home. It allows you to purchase a home before you sell your existing home.
Advantages:
- Allows you to have a new home available so that you can move into the home without being displaced and waiting for your home to settle before you purchase a new home
Disadvantages:
- Bridging loans can be more expensive than normal residential loans as there is more risk to the lender
- Additional fee’s such as interest repayments on the additional loan are included over the bridging period
100% Offset Loan Account
A 100% offset loan is very similar to an all-in-one loan. Rather than putting all your salary and other income into your loan, it goes into an offset account that is directly linked to your home loan. Any balance in the offset account is 100% ‘offset’ against your home loan. This reduces the amount of interest you have to repay, making your money work harder for you.
Advantages:
- Can save you substantial amount of interest if used correctly
- Operates like a normal transaction account and has a chequebook, ATM card, etc. attached
Disadvantages:
- May have higher monthly fees attached to the account
- May require a minimum balance in the account
Line of Credit Loan
A line of credit loan provides you with access to the equity in your home or investment properties up to a pre-approved limit. You access the funds as you need to. The interest rate on a line of credit loan is usually a variable rate and repayments are interest only.
Advantages:
- You can use the money when you need it and pay it back when you can
- Rates are generally lower than a personal loan or credit card
- In some cases your interest repayments can capitalised of you have available funds meaning you don’t need to make regular repayments
Disadvantages:
- Unless care is shown it is possible to reduce the equity you have built in your home
Low-Documentation & Credit Impaired Loans
A low documentation (or no documentation) loan is suited to investors or self-employed borrowers who do not meet the ‘standard’ lending criteria. This may include; those with an impaired credit history, those who are unable to provide the required documentation in support of their loan application, or those who wish to borrow more than 100% of the property value.
Advantages:
- In some cases you only need to provide 12 months BAS statements and not full tax returns
- Can have features such as redraw, line of credit, variable or fixed rates, principal and interest or interest only
Disadvantages:
- Generally a higher interest rate than a full documentation home loan however this is not always the case as it can vary between lenders
Construction Loans
If you are building your own home or investment property, a construction loan may be suitable for you. This loan requires a fixed price building contract from a registered builder. These loans are usually interest only for the period of building and then become principal and interest once building is completed. A construction loan allows you to draw money as is required whilst building. Also, with the usual necessary documents required when applying for a loan, construction loans also require a ‘fixed price building contract’ and ‘council approved plans’.
Advantages:
- Competitive variable interest rates
- Facility to draw money when necessary whilst building
- Interest only payments during the building period
- Additional payments can be made
Disadvantages:
- Requires a fixed price building contract leaving little room for change whilst building
- Some lenders charge a fee for every time you draw money whilst building
- Given it is a variable loan; loan repayments will increase if interest rates increase