It can be hard to separate the good from the bad.
Taking on a mortgage loan is one of the biggest financial decisions you’ll make in your life. With so many different types of mortgage loans out there, it can be difficult to know which option could be right for you.
There are loans that cater to risk appetite, different property types, as well as loans that cater to the borrower's financial capacity. Here, we uncover the spectrum of loans available, how they work, and if they could be right for you.
Option #1: Variable rate home loans
How it works: Variable rate loans are one of the most common loans used in Australia. With variable rate loans, the interest rate is set to imitate the RBA cash rate and as a result, this loan is perceived to be riskier.
There are two types of variable rate loans:
- Basic variable rate home loan: This loan often has a lower interest rate and is lighter on extra features.
- Standard variable rate loan: The interest rate is higher than the basic loan, however, it has useful extra features such as the ability to make extra repayments, make withdrawals and use offset accounts. Furthermore, refinancing can be done with ease and with no cost.
Who it’s for: These are the most popular loans in Australia for a reason — they’re generally flexible and have a lower interest rate, making them a great option for everyone.
Option #2: Fixed rate home loans
How it works: Fixed rate loans generally lock in your interest rate for 1 to 5 years at a rate above the current variable rate. While this loan type hedges you from the risk of interest rate rises, it excludes you from the benefits of interest rate drops. Like the basic variable loan, you’ll have limited or restricted access to make extra repayments to save on interest, access to the redraw facility or offset accounts. Once you’re signed up for a fixed rate mortgage, it can sometimes cost more than it’s worth to switch loans during the fixed term period.
Who it’s for: This type of loan is perfectly suited for borrowers with conservative risk appetite and who prefer to plan their own budget long-term.
Option #3: Split loans
How it works: As the name suggests, many lenders will allow you to split your loan between a fixed and variable rate. Usually, you will fix one part of the loan and the remaining term will have a variable rate.
Who it’s for: This is a great option for most people, as it gives you some added protection from rate fluctuations whilst allowing you to benefit from cuts. Most lenders provide flexible options when setting the fixed/variable portion of your loan.
Option #4: Interest-only home loans
How it works: Interest-only home loans typically have higher rates than principal-interest loans due to the ease that it provides to the borrower. Interest-only loans generally run for 1 to 5 years, and the borrower does not have to pay any of the principal but only the interest.
Who it’s for: This is a great option for investors who are wagering on house price increases and who are planning to sell in the short-term.
Option #5: Guarantor home loans
How it works: If you need to borrow more than 80% of the property purchase price, you could consider a guarantor loan. Guarantor home loans involve using someone else’s (in most instances, a relative) property as a security blanket for your loan. If you choose a guarantor loan, make sure you have a proper discussion with your guarantor as their “security blanket” means their property could be seized by the banks in the event of your default.
Who it’s for: This type of loan is a great option for first home buyers who aren’t able to quite make the 20% deposit or those who want to purchase additional properties and require some financial support.
Option #6: Line of credit home loans
How it works: Line of credit loans are flexible loans that allow you to draw down and repay sums at any time up to the approved loan limit. These loans have no agreed term and repayments are also interest-only, based on the amount you have drawn down at the time.
Who it’s for: Thanks to its flexibility, a line of credit mortgage is a great way to borrow money for investments and wealth creation, as well as for renovations.
Option #7: Construction home loans
How it works: This loan is unique in that it's paid straight to your builder. It’s also unique in that it’s not a single loan, but rather a series of smaller loans given out in instalments at each stage of construction. For example, after paying the deposit for the land, you can draw down on the loan when the slab is laid, when the main housing frame is finished, when the brickwork is laid, and so on.
Who it’s for: This loan is ideal for people building their own homes that want to have an extra layer of oversight on their spending.
Option #8: Honeymoon rate mortgage
How it works: Honeymoon rate mortgages offer introductory rates that are below the current variable rate. This rate usually lasts between 6 to 12 months after which it reverts back to the standard variable rate. One of the main drawbacks with this type of loan is when the mortgage reverts back to the standard rate, you could be stuck with a rate that isn’t competitive. It can also be costly if you decide on refinancing in the future.
Who it’s for: This type of mortgage is a great way for borrowers to ease into their repayments. It can also give borrowers the opportunity to make extra repayments so they can be in a better position when their mortgage reverts back to normal.
Option #9: Packaged loans
How it works: These loans are also marketed as Professional Packages or Pro Loans and refers to loans with other features and discounts included within the entire package. Common features and discounts offered in these packaged loans include:
- Credit cards with no annual fees
- Interest rate discounts
- Additional no-fee accounts such as Offset accounts
- Fee waivers
- Reduced fees for timely repayments
Who it’s for: Packaged loans are generally offered to borrowers whose loans are greater than $150,000 (although this figure varies) and were originally designed for high-income earners in specific professions (hence the name).
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