Securing a home loan isn’t really the daunting task it’s made out to be. While a strong credit history and a higher deposit amount can certainly make life easier when it comes to negotiating with a lender, what’s most important is that you approach the process with an idea of the type of loan best suited to your needs. With this in mind, we’ve broken down some of the key concepts and compiled a list of home loans you need to know when weighing up what option is right for you…
Principal & Interest
When it comes to home loans, there’s definitely no shortage of options available. The simplest way to sort the different types of loans and ascertain which is best suited to your needs is to gain a basic understanding of the two concepts at the core of every loan:
- Principal – the amount of money you borrow
- Interest – the cost of borrowing the money (which is calculated on outstanding principal)
From here, there are a number of features and structures which can be added to your loan. We’ve broken down some of the most common types to help you understand the mortgage marketplace!
Variable Rate Loan
The most popular type of home loan in Australia, opting for a variable rate loan means that the interest rate you pay may vary depending upon the movement in market interest rates. You can expect your repayment amounts to increase and decrease over the course of the loan.
With this type of loan the interest rate you pay – and your repayments – are fixed for a designated period, normally between one and five years. Given you are protected from increases in market interest rates it can definitely be easier to budget for repayments with a fixed loan. The key shortcoming is that you could end paying more than necessary if interest rates drop.
Most lenders will offer you the opportunity to fix one part of your home loan while the remaining part is subject to a variable rate. The advantage of this is you get the best of both worlds – some insurance from rising interest rates AND the ability to benefit from any rate cuts.
OTHER LOAN OPTIONS
The choice doesn’t end with variable, fixed and split home loans. Within these three primary categories, there are also other options available to choose from…
Basic vs. Standard
While the definition of ‘basic’ varies greatly between lenders, this type of loan can be broadly considered as a variable rate home loan. Although they usually come with a cheaper rate, this is often at the expense of many of the ‘standard’ loan features.
An offset loan links a savings or transaction account to your home loan. The benefit of this is that if you have some spare savings you can deduct this from (or ‘offset’ against) the value of the loan for the purpose of calculating interest.
Sometimes referred to as an ‘ongoing discount’ loan, this type of loan combines home loans with other financial products, such as a transaction account and/or credit card. Fee waivers on some or all of the bundled products are normally standard here, as well as a discount on the loan interest rate.
Line of credit
A line of credit loan permits you to draw from a fixed amount at any time for any purpose – whether it be to pay for a holiday, renovations or shares. In essence, your home acts as security for the loan while you have access to a large amount of credit.
A low-doc loan can be either fixed or variable and is primarily intended for self-employed persons who don’t have the required financial documents to secure a loan. These days, however, most lenders afford self-employed borrowers the same opportunities as traditional borrowers, so the demand for this type of loan is steadily declining.
If you need more information on home loans or regarding the banks or lenders’ decision-making process, then be sure to contact our industry experts on 1800 184 284. You can also book a call online.