01 Feb Understanding The Different Types of Home Loans
If you are planning to buy a new home, you are also probably considering your choices for loans.
But before deciding which type of loan to acquire, you should know first the types of home loans and find out which one is best suited for your needs. To help you arrive at a decision, we listed below the different types of home loans for you to learn.
- Variable Rate Loans
- Redraw Facilities
- Fixed Rate Loans
- Split Loans
- Building/Construction Loans
- Honeymoon Loans
- Line of credit loans
- Interest Only loans
- Guarantor Loans
- Non-Conforming Loans
- Low Doc Loans
- Full Doc Loans
- Self Employed Loans
Variable Rate Loans
The type of loan that is mostly chosen by consumers for flexibility and benefits, variable rate loan offers varying monthly repayments to borrowers. The repayment amount may go up or down depending on the current market interest rates and the Reserve Bank of Australia’s cash rates.
This home loan is ideal for people who are willing to take the risk of higher interest rates to get the benefits that other types of loan don’t have. These include the ability to make extra repayments without charge, redraw facility that allows you to borrow money that you already repaid, offset account option to help you pay for the home loan principal. With a variable rate loan, borrowers also have an option to refinance the home loan if they find a better deal elsewhere.
A home loan with a redraw facility allows you to borrow back money you’ve already repaid. This type of arrangement is usually offered with variable interest rate loans. A redraw facility allows you to be flexible with how you repay the loan. If you have spare money in your savings, you can pay this onto the loan knowing that you can re-draw it at any time.
For example, your minimum monthly loan repayments are $700. If you pay $900 each month for a period of 6 months you’ll have paid an extra $1200 on top of what you had to pay. A redraw facility allows you to access that extra $1200 if you need to. Bear in mind that most borrowers only do this in the case of an emergency.
This type of home loan enables the borrower to have a fixed interest rate and repayment amount for the agreed loan term which typically from 1-5 years. When the fixed term period is done, you can opt to have another fixed rate loan for another term period or have the loan return to a variable rate.
With fixed rate loans, you can plan your budget better because the repayments are the same for the entirety of the loan term. However, this type of loan is not ideal if you want to make extra repayments or do lump sum payments before the term ends. These payments are either subject to fees or not possible at all. Also, interest rates can go high or low anytime, which makes it hard to decide if the fixed rate is ideal. If you decide to fix the rates but suddenly want to shift to a variable rate, there will be break costs charged for termination of the fixed rate.
Among the types of home loans, the Split Home Loan is the one that enables the borrower to a have loan that comprised of multiple parts. It can include a fixed, a variable, or a line of credit split, all in one loan. Split home loan is a flexible type of loan. It can allow you to have a fixed rate for a part of the loan but still have repayment and interest security options.
Since split loans can have a variable interest rate, your repayments will also be higher once the rates go up. Although compared to a variable home loan, this will only happen for a portion of your loan.
Building & Construction Loans
Among the different types of home loan, this one is the most suitable for building a new home or doing home renovations.
The loan is drawn down in stages, from the initial land purchase to the different construction stages. Borrowers will only pay interest on the amount that was drawn down. The interest rate can vary during the different stages of the home construction, which could be both an advantage and disadvantage to the borrowers.
Honeymoon and introductory loans
Honeymoon and introductory loan incorporates a variable rate that is discounted for an ‘introductory period’ and only lasts for a short period. Here, borrowers are given lower interest rates at the beginning of the loan, which usually happens during the first year of the loan. Borrowers can also choose an introductory period from 6 to 36 months.
The rate is fixed for a specific term period and will go back to the higher standard variable rate after the agreed period ends. Extra repayments can be made during the fixed rate period, which will help decrease the principal and interest repayments. After the initial period, the repayments will increase when the rate becomes variable.
Line of credit and equity loans
Perhaps the most flexible among the types of home loans, the line of credit and equity loans can be used for many purposes.
In this type of loan, lenders will offer an exact credit limit that uses a registered mortgage on a residential property as collateral. Because of this, the interest rates are much lower.
Line of credit and equity loans are ideal for people who plan to do investments, renovations, or property acquisitions. Usually, the principal repayments are not necessary for this type of loan, while minimum interest repayments are required every month. When the credit is drawn, that is the only time that interest is charged.
However, this home loan is vulnerable to the rise of interest rate, just like variable rate home loans.
Interest Only Loans
With Interest Only Loans, borrowers will only pay the interest on the loan for the first seven years. Afterwards, they will start paying for the principal loan and what is left with the interest.
This type of home loan is ideal for borrowers who are young professionals and still have low income. As their career progresses, they will have higher salaries in time to pay for the principal of the loan. This type of home loan is also suitable for people who are buying and selling properties.
Among the different types of home loans, Guarantor loan is the one that enables borrowers to get away from lenders mortgage insurance by providing a guarantor.
Any of your family members can be your guarantor by putting their assets as security for your home loan. However, you need to make sure that you will not default on your loan because your guarantor’s property will be seized once the lender can’t get money from you.
Proper discussion with your guarantor is a must before pursuing a guarantor loan. With Guarantor Loans, people are able to borrow 80% of the property price.
Non-conforming loans are suitable for unemployed people, individuals with poor credit, and those who want to borrow 80% of the property price.
To be able to borrow 80% of the property value (which is the highest LVR limit), a Lender Mortgage Insurance (LMI) is required. If there is no LMI, only 60% LVR can be obtained. Also, the interest rate tends to be 2-4% higher than traditional loans. It will be determined by the lender’s loan assessment and risk evaluation.
These loans can include some aspects and features of variable and fixed-rate loans, which are available for both property investors and home buyers.
Low documentation loans
A ‘low doc’ loan is a home loan where only limited financial report and tax returns are required by the lenders. Borrowers are only required to submit self-declaration of income, business activity statements for 12 months, business account statements for 3 months, and an accountant’s certified letter to confirm business and trade position. A GST registered current ABN for the past 6 to 12 months is also required from low doc borrowers.
This type of loan is very ideal for small business owners, freelancers and other self-employed people who don’t have regular income sources and any financial information that can be shown to lenders.
Full Documentation Loans
A full documentation loan is more ideal for those who can verify their income and assets, by showing financial reports and documents.
These documents usually include 2 years financial statements, 2 years of business and personal tax returns, loan statements, and other documents that can help determine your current personal and business commitments. These reports can easily be accessed with the help of your accountant.
These types of home loans have their own advantages and disadvantages. It’s up to you to decide which one is best suited to your current financial situation.
Home loans for self-employed
This is another type of loan that is ideal for self-employed individuals or small business owners aside from low doc and non-conforming loans. There will be assessments depending on the type of loan, which will be based on the business income, net asset, and the borrower’s ability to pay his/her debt.
Lenders usually require borrowers to be self-employed for two to three years and can present at least one year of financial statements.
Get your Home Loan with Finance Ezi
Finance Ezi will help you assess which type of home loan is most suited for you. We have a wide range of home loan options available for borrowers with any type of financial situation.
Don’t risk getting the wrong home loan. Call us today on 1300 003 003 or apply online now to find the best deal on your next home loan.