You’ve saved the deposit, you’re ready to buy a property, but first you’ll need to apply for a home loan.
Or you’re refinancing your current mortgage and don’t know what type of home loan would suit your circumstances best.
Even if you are engaging a mortgage broker to advise you and help you find a home loan, it’s a good idea to first get an understanding of the key types of home loans available.
All home loans are based on the principal (that’s the amount you are borrowing) and interest (the amount you are charged for borrowing the money, calculated daily on the outstanding balance of the principal). How home loans are structured, however, can vary.
Here are a few of the most common types:
1. Variable Rate
Variable rate home loans are the most common in Australia. The amount of interest you will pay will vary based on the lender and market changes in interest rates. This means that your minimum repayment amount may become larger or smaller over the term of your loan.
Home loan interest rates in Australia are currently at historic lows. So if you take out a variable rate home loan now you need to be aware that the interest rate you have now may change in the future. For example, should interest rates rise, so will the amount you need to fork out for each repayment.
With a variable rate loan, you can typically make extra repayments at any time, allowing you to pay off your home loan faster. If your home loan has a redraw facility, then this extra money may be available to you in an emergency.
With variable rate home loans you will also come across the terms ‘basic’ and ‘standard’. A basic home loan may have a lower interest rate, but fewer features than a standard loan. Features such as a redraw facility or offset account can help you pay off your home loan faster, so it’s important to weigh this up when choosing between a basic or standard package.
2. Fixed Rate
With a fixed rate loan, the interest rate is fixed for a set term – usually one to five years but sometimes longer – and is not affected by market changes during that period. For that period, you have the security of knowing exactly how much your repayments will be each month. If interest rates rise you are protected, but if they fall you don’t get the advantage of lower rates.
Not all lenders will allow extra repayments on a fixed rate loan or offer a redraw facility.
3. Split Loans
A split loan allows you the opportunity to benefit from where interest rates might be heading. Most lenders will allow you to fix the interest rate on part of your home loan while the remainder is at a variable interest rate.
4. Low-doc Loans
If you are self-employed and don’t have all the financial documents necessary to provide proof of income then a low-doc loan may be an option. Interest rates may be higher than for a standard variable or fixed rate loan.
5. Lines of Credit
A line of credit is a special type of loan that is a little like a credit card or overdraft. The approved loan amount is available for you to use at any time, with interest charged only on the amount you draw out.
A line of credit can be used for the deposit on an investment property, renovations to your current home or other purposes but needs to be treated with care. It requires financial discipline to handle a line of credit wisely.
6. Offset Accounts
As well as a redraw facility, another feature available with some home loans is an offset account.
An offset account can be used to pay off your home loan faster.
Basically it’s a savings or transaction account linked to your mortgage. The balance in your offset account is deducted from the balance owing on your home loan for the purpose of calculating interest. Say you have $30,000 in your offset account and you owe $400,000 on your mortgage.
The interest on your home loan will be calculated on the net balance of $370,000. This can lead to substantial savings over the term of your home loan.
If you want to know more about these types of loans or an offset account, ask an expert – your broker!
By knowing the types of home loans available you will be better able to compare home loans and understand fully why your mortgage broker is recommending certain lenders as having the most suitable home loans for your circumstances. Your mortgage broker may also be able to offer you home loan protection insurance to help secure your financial future should those circumstances change due to serious illness or accident, unemployment and even death.