Finding the right home loan is as important as locating the right home. But, with multiple types of home loans and hundreds of lending products on the market, how do you find the right loan for you without feeling overwhelmed by choice?
Let’s look at the various types of home loans available in greater detail. This strategy will allow you to assess home loans based on your circumstances so that you can find the right fit for you and your goals.
Variable Rate Loan
One of the most popular home loans in Australia is the variable rate loan. Why? Well, this type of loan package is often cheaper. So, you could pay off your loan faster and enjoy financial flexibility without feeling deprived.
Also, the interest rate for this type of loan fluctuates according to the market. Plus, home loan repayments pay off the loan principal and interest. A base variable loan, which doesn’t include any features, is available at a lower rate of interest.
But, what are the advantages and disadvantages associated with the variable loan? Let’s find out.
Variable Loan Pros
- Variable rate mortgages typically have a lower introductory rate than the standard variable loan.
- Rates fluctuate with the market so a rate drop could decrease repayments.
- You can make extra repayments when you want for any amount.
- Cheaper base variable rates are available.
- Variable rate home loans are often easier to secure than other types of home loans.
Variable Loan Cons
- If rates rise, you’ll pay more for your home loan monthly.
- A larger deposit is needed to secure the loan.
- Budgeting can be harder to manage due to the risk of rate rises.
Fixed Rate Loan
This loan has a fixed rate for a specified term – usually between one to five years. Thus, your home loan repayments remain the same for this duration. Then, when the fixed term ends, your loan reverts to the current variable market rate. At this time, you can decide whether to fix your loan again. There are several benefits and disadvantages associated with the fixed loan. These are as follows:
Fixed Loan Pros
- Repayments remain the same over the fixed term.
- Rate rises do not affect you.
- Easier to manage household finance.
- You have greater financial certainty, and you’re able to reduce your stress.
Fixed Loan Cons
- If rates drop, you remain at a higher rate.
- Interest rates and loan costs may be higher than someone with a variable rate loan.
- Extra repayments are limited to $10,000 or less per year.
- If you exceed the extra repayment threshold, you’ll incur a penalty fee.
- Early exit fees do apply.
- Revert rates at the end of the loan term may be more than the market rate.
- Always read the contract terms as you may pay a much higher rate when the loan term ends.
Split Rate Loans
When you take out a split rate loan, you can elect to fix a portion of the loan and leave the rest variable. This type of loan gives you the best of both worlds. So, you can have the loan features you want on the variable share. Also, you can pay this off as fast as you wish. Whereas, the fixed portion gives you peace of mind and budgeting assurance.
So, what are the advantages and disadvantages of this loan?
Split Rate Loan Pros
- The fixed portion of your loan stays consistent, making budgeting easier.
- If interest rates drop, so will your variable repayments.
- It’s possible to pay off the variable part of your loan quicker.
Split Rate Loan Cons
- Should rates rise, so will the monthly repayment on the variable part of your loan.
- Restrictions apply to extra repayments made on the fixed portion.
- Financially you will be penalised if you exit the fixed portion of your loan early.
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Interest Only Loans
An interest only loan requires you to pay the interest your loan incurs monthly. Terms are typically from one to five years. However, in some situations longer terms are available. When the interest-only period expires, you’ll then start to pay off the interest and principal of the loan. These loans are popular with investors, and those building a home. Typically, an investor will pay off the principal when the property sells, while those building a home have a one-year fixed term, which is usually long enough for home completion.
What are the pros and cons of this type of loan?
Interest Only Loan Pros
- Lower monthly repayments.
- Fixed and variable options are available.
- Greater flexibility.
- Frees up cash flow.
- Can include loan features – redraw and offset.
- Helps investors maximise tax deductions.
Interest Only Loan Cons
- Your level of debt doesn’t decrease.
- Higher interest rates.
- Interest cost is still higher.
- Regular payments increase after the interest-only period expires.
- Not all lenders offer interest-only loans.
- The loan balance is paid off at the end of the loan term.
Low Doc Loans
The low doc loan needs less documentation than other types of home loans. Therefore, a low doc loan ideally suits self-employed people who may not have the usual proof of income.
Just bear in mind that this loan could come with more demanding terms. Although, if you’re a business owner or contractor, this could mean the difference between securing a loan or not.
Low Doc Loan Pros
- Lower evidence of income requirements.
- May overlook a poor credit rating.
Low Doc Loan Cons
- Higher interest rate.
- Larger deposit.
Are you looking for a home loan and wanting to know more about the various types of home loans available to you? Then contact eChoice, our brokers have access to 100’s of products so we’ll help you find a competitive mortgage rate.