For most, purchasing a home wouldn’t be possible without some help from banks and lenders – even some multimillionaires use them to finance investments and properties. For anyone who doesn’t have the entire purchase price up front, home loans are essential. As a result, there are a variety of different home loans available to buyers. In fact, there are so many that consumers may have a hard time deciding which one is the best fit for them!
Here’s a breakdown of the different types of home loans available:
Variable Rate Loans
One of the main options for most home buyers, these rely on the Reserve Bank of Australia’s cash rates, and the subsequent fluctuation of interest rates (Or recently – the subsequent hold). This means that borrowers may have lower repayments in a certain month, but if rates rise their payments may do as well.
This can seem like a gamble to some, yet many borrowers opt for this because Variable Rate Loans can give customers the ability pay your loan off faster through things like extra repayments, a redraw facility and an offset account:
- Extra repayments facility – this allows you to pay more than your regular monthly repayments, saving you money on the interest of the loan and shortening the length of time you will have to pay it off.
- Redraw facility – Once that you’ve made additional payments to your loan, you can then borrow some of the money you’ve already repayed, which can be used in purchasing a new car, a family holiday or a home upgrade
- Offset account – another backup payment option where you place a portion of your pay into an offset account to subtract from your home loan principal
Additionally, if you happen to find a more suitable or better home loan, most lenders won’t charge you for refinancing your loan with other providers.
Fixed Rate Loans
As the name suggests, this type of loan locks in your home loan interest rate for a period of 1-5 years, generally at a rate slightly above the current variable. Fixed loans are great for borrowers who are on a budget or don’t want to bet deal with inclement interest rates.
Because homeowners will have a fixed amount to pay every month, there’s less trouble thinking about whether or not you can afford to pay the loan. On the other hand, in addition to the high mortgage rate, you can’t enjoy the other benefits of a variable loan and it can be difficult to switch to another home loan or refinance, as lenders often charge a break cost fee.
Interest Only Loans
If you want to have a quick escape from the traditional home loan payment, you can go on the interest only loan route and pay for your interest only, minus the principal – for the meantime. This is a popular choice for property investors who are looking for negative gearing, as well as those hoping to make a profit by selling the property again, provided it doesn’t depreciate.
Importantly, the interest-only arrangement usually only for a maximum of ten years. After that, the borrower will have to start paying down the usual principal and interest repayment.
If you’re looking to borrow more than 80% of the purchase price but don’t want to pay for lenders mortgage insurance, you can ask your parents or other family members to be your guarantor and use a portion of their home as a security blanket for your own mortgage – an option to consider if you’re a first time buyer eager to get your foot into the property market.
There are some less common types available too:
Low Doc Loans & Non-Conforming Loans
This is a perfect fit for freelancers, business owners, or self-employed people who don’t have some of standard papers – pay slips and the like – used to apply for a loan. Usually, an income declaration and other financial statement, such as bank statements and BAS, are enough to assess the credibility of the borrower. Low-doc loans generally carry higher interest rates and fees compared to other loans.
While these loans are good news for those who don’t qualify for other options, it’s important to note that non-conforming loans usually have higher interest rates than their more-standard counterparts. This means it’s not the best idea for young couples or low income earners.
There are lots of different types of loans to suit your needs – give us a call so we can find the one that’s best for you!