If you are overwhelmed by the sheer amount of different types of home loans available, then you’re not alone.
Among common questions from borrowers include:
- How many loans are there out there?
- Which one would be best for me? And,
- How do variable home loans work?
Here’s a handy guide on the eight common home loan types.
Variable Rate Loans
A majority of property buyers opt for a variable rate loan. This means that the loan’s interest rates are based on the Reserve Bank’s cash rates, so you might have a lower repayment one month and a higher one the next month, depending on rate fluctuation.
There may be some concern about the level of risk with this loan type, but this option is great for those looking for a way to make initial payments lower. You can also usually pay some of the loan off early if you have the funds to do so.
Fixed Rate Loans
How do fixed rate home loans work? They lock in your rate for up to five years, generally at a higher rate than the current variable. This is a good option if you are on a budget or you suspect that interest rates may go up. While there’s less concern with this loan product as you will know how much to expect to pay back each month, it can be difficult to switch loan providers without paying a break fee.
Split Interest Rate Loans
If you want to hedge your bets, split interest loans are a good option. Under this loan product, part of your home loan is locked in, while the other part is variable.
Interest Only Loans
Property investors looking for negative gearing, or wanting to make a profit by selling a property on sooner, may prefer an interest only loan.
With an interest only loan, you can avoid paying the principal for a set time and just pay the interest instead. This may be a good option for young homeowners as well as those on low incomes. In many cases, you may only get a maximum agreement of six years for an interest only loan.
Guarantor Loans
If you are borrowing more than 80% of your purchase price but you don’t want to pay for lenders mortgage insurance as well, then a guarantor loan is your best option. A parent or another family member can use part of their property as security against your mortgage. This may be beneficial for first-time property buyers. However, make sure your guarantor is aware of the default risks.
Low Documentation Loans
Low doc loans are great for business owners, freelance workers, or people who don’t have regular pay statements or other standard papers to apply with.
An income declaration and other financial statements will be used to assess your suitability for a loan product. You’ll have to pay higher fees and interest rates with this type of loan.
Line of Credit Loans
A line of credit home loan allows you to borrow money using the equity in your property. The equity is the value of your property minus any money you owe on it.
You can choose how much to borrow, up to the limit that the lender sets. You can then access the funds when you need rather than borrowing all of the money at once. You only pay interest on the amount you borrow, and you will only need to make repayments when you have reached your loan limit. You may have to pay fees, including monthly or annual fees with this loan product.
Non-Conforming Loans
If you have a poor credit history, want more than 80% of the property value, or have been unemployed for a while, this is the likely loan product to suit your circumstances. It works in a similar way to a low doc loan.
This article has been contributed by Gerald Chikwanda from Fortuna Advisory Group.