- 11 Jul, 2017

Types of Home Loans Available

Without a doubt finding the right home loan is as important as finding the right home. But, with hundreds of lending products on the market, how do you find the right loan for you?

Variable Loan

One of the most popular home loans in Australia is the variable rate loan. The interest rate for these loans fluctuates according to the market. Home loan repayments also pay off the principal and interest. Plus, a base variable loan is available which doesn’t include any features. This loan package is cheaper, which can increase your cash flow. So, you can pay off your loan faster.

Pros

  • Rates fluctuate with the market so that a rate drop can decrease repayments.
  • You can make extra repayments when you want.
  • Cheaper rates occur with a base variable

Cons

  • If rates rise, you’ll pay more monthly.
  • Larger deposit needed.
  • Budgeting can be harder to manage.

Fixed Loan

The rate for this loan remains the same for a fixed term – usually between one to five years. Thus, your regular repayments remain the same over this duration. Then, when the fixed term ends, your loan reverts to the current variable market rate. At this time, you can decide whether or not to fix your loan again.

Pros

  • Repayments remain the same over the fixed term.
  • Rate rises do not affect you.
  • Easier to budget and manage household finance.

Cons

  • If rates drop, you remain at a higher rate.
  • Costs may be higher than someone with a variable rate loan.
  • Limited extra repayments.
  • Early exit fees do apply.

Split Rate Loans

A split rate loan enables you to fix a portion of the loan and to 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.

Pros

  • The interest rate varies less, making it easier to budget.
  • If interest rates drop, so will the repayments on your variable portion.
  • It’s possible to pay off the variable part of your loan quicker.

Cons

  • Should rates rise, so will the monthly repayment on the variable part of your loan.
  • Extra repayments are controlled on the fixed portion.
  • Financially you will be penalised if you exit the fixed portion of your loan early.

Interest Only Loans

An interest only loan requires you to pay the interest incurred 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, who aim to pay off the principal when the property sells.

Pros

  • Lower monthly repayments.
  • Fixed and variable options are available.
  • Greater flexibility.
  • Frees up cash flow.
  • Can include loan features – redraw and offset.

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.

Low Doc Loans

The low doc loan needs less documentation than others. 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 can come with more demanding terms. Although, if you’re a business owner or contractor, this can mean the difference between securing a loan or not.

Pros

  • Lower evidence of income requirements.
  • May overlook a poor credit rating.

Cons

  • Higher interest rate.
  • Larger deposit.

Do you need to discuss home loan types with a lending professional? Then contact eChoice. Our brokers have access to 100s of products, so we’ll help find you a competitive mortgage rate.


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