Home Loan Types

There are literally hundreds of home loans available with new products emerging all the time.

We can help you find a loan that suits your particular needs, help you complete the paperwork, professionally package it with your supporting documents and submit it to your chosen lender.

If you want to check out some clever tools, visit How much can I borrow or work out monthly or fortnightly repayments with our calculator.

Variable loans

Most lenders use standard variable rate as a benchmark. Interest rates go up or down over the life off the loan depending on the official rate set by the Reserve Bank of Australia and funding costs. When you choose, principal and interest repayments, your regular repayments pay off both the interest and some of the principal.

You can also choose a basic variable rate, a no frills product with fewer features like redraw and repayment flexibility.

Pros

  • If interest rates fall, your minimum repayments will go down too.
  • Standard variable loans allow you to make extra repayments. Even small extra payments can cut the length and cost of your mortgage.

Cons

  • If interest rates rise, the size of your repayments will too. This can impact your budget, so always budget to include a 2% rate rise.
  • You need to be disciplined around the redraw facility on a standard variable loan. If you dip into it too often, it will take much longer and cost more to pay off your loan.

Fixed

The interest rate is fixed for a certain period, usually the first one to five years of the loan. This means your regular repayments stay the same regardless of changes in interest rates. At the end of the fixed period you can decide whether to fix the rate again, at whatever rate lenders are offering, or move to a variable loan or even to a different lender.

Pros

Your regular repayments are unaffected by increases in interest rates, which means budgeting is easy.

Cons

  • If interest rates go down, you don’t benefit from the decrease. Your regular repayments stay the same.
  • You can end up paying more if the variable rates are lower than your fixed rate.
  • Additional repayments are limited during the fixed rate period and going over the limit may incur penalty.
  • Break costs can be exorbitant!

Split rate loans

Your loan amount is split, so one part is variable, and the other is fixed. Read more about it here http://smartmoneysolutions.com.au/?p=447

Interest only

You repay only the interest on the amount borrowed usually for the first one to five years of the loan, although some lenders offer longer terms. Because you’re not also paying off the principal, your monthly repayments are lower. At the end of the interest-only period, you begin to pay off both interest and principal. These loans are especially popular with investors who plan to pay off the principal when the property is sold, having achieved capital growth.

Pros

  • Lower regular repayments during the interest only period.
  • If it is not a fixed rate loan, you have the flexibility to pay off, and often redraw, the principal at your convenience.

Cons

  • At the end of the interest only period you have the same level of debt as when you started.
  • If you’re not able to extend your interest-only period, you could face the possibility of increased repayments.
  • You could face a sudden increase in regular repayments at the end of the interest-only period.

Line of Credit

Line of credit is like a big credit card – you only pay interest on the portion that you have used. You can pay into and withdraw from your home loan every month, so long as you keep up the regular required repayments. Many people choose to have their salary paid into their line of credit account. This type of loan is good for people who want to maximise their income to pay off their mortgage quickly and/or who want maximise flexibility in their access to funds.

Pros

  • You can use your income to help reduce interest charges and pay off your mortgage quicker.
  • Provides great flexibility for you to access available funds.
  • You can consolidate spending and debt management in a single account.

Cons

  • Without proper monitoring and discipline, you won’t pay off the principal and will continue to carry or increase your level of debt.
  • Line of credit loans usually have slightly higher interest rates.

Introductory/Honeymoon

Introductory loans offer a discounted interest rate for the first 6 to 12 months, before the rate reverts to the usual variable interest rate.

Pros

  • Lower regular repayments for an initial ‘honeymoon’ period.

Cons

  • Loans may have restrictions, such as no redraw facilities, for the entire length of the loan.
  • May end up paying higher other fees like establishment fees.
  • You may be locked into a period of higher interest rates at the expiry of the honeymoon period

Low doc

Popular with self-employed people, these loans require less documentation or proof of income than most, but often carry higher interest rates or require a larger deposit because of the perceived higher lender risk. But if this isn’t possible, a low doc loan may be your best opportunity to borrow money. Of late, lenders are stricter with the documents and it can seem that low doc loans are no longer truly low docs!

Pros

  • Lower requirement for evidence of income. May overlook non-existent or poor credit rating.

Cons

  • You will probably pay higher interest than with other home loan types, or may need a larger deposit, or both.