What are the different types of Home Loans available?
There are a surprising number of home loan types & features available on the market. As your Broker, Canfinance can help you determine which ones offer may meet your current needs & work with you to regularly review your structure as your situation changes over time.Standard Variable Home LoanBasic Variable Home Loan
Fixed Rate Home Loan
Introductory/Honeymoon Rate Home Loan
Line of Credit Home Loan
Combination/Split Home Loan
Construction Home Loan
Bridging Home Loan
Low/No Documentation Home Loan
Credit Impaired/Non Conforming Home Loan
Equity Release/Reverse Mortgage
STANDARD VARIABLE HOME LOAN
This is the 'benchmark' or standard variable interest rate for each lender. This home loan is usually more flexible as it is generally well featured. The interest rate, fees & charges reflect this so determining which of these is important to your circumstances will assist in understanding if it will suit you. As the interest rate can be slightly higher compared to other types of loans a comparison between the features you really want is important. As per all variable rate loans the interest rate will rise and fall, as set by the Reserve Bank of Australia & the individual lenders margin and this will therefore affect repayment requirements. If the features on offer are attractive, considering a “professional package” (see under features) may be a great way to obtain these in conjunction with a lower rate. [top]
BASIC VARIABLE HOME LOAN
This is a 'no frills' or “base rate” variable rate home loan with a discounted offered off the standard variable interest rate. It is a cut down version of the standard variable loan with fewer features on offer or lenders may charge a fee for access which may reduce flexibility. As per the standard variable home loan, the interest rate will rise and fall, as set by the Reserve Bank of Australia & the individual lenders margin and this will therefore affect repayment requirements. [top]
FIXED RATE HOME LOAN
A fixed rate home loan is where the interest rate and repayments are fixed or locked in for a set period of time, usually 1-5 years but available up to 10 years and in some cases longer. After the fixed period ends, the loan will revert to a variable rate (usually the standard variable). [top]
The advantage of a fixed interest rate is having certainty about your home loan repayments making budgeting easier. It also protects you from potential interest rate increases. Many people consider fixed rates when they are on a fixed income with limited capacity to increase their repayments if rates rise or wish to be able to fund an investment with certainty of the ongoing contribution.
The disadvantages can be a reduction in flexibility meaning there are usually restrictions on extra repayments, redraw etc. If you “break” or repay a fixed rate loan prior to the end of the fixed term there can be significant costs incurred. Generally, if you break whist the variable rate is higher there may be a small or no penalty, however if you break to take advantage of lower variable rates then the costs could be significant. You may consider a fixed rate term for a period that you anticipated little to no change in your circumstances that would entail re-paying the loan. For example many people have a reasonable expectation as to their circumstances for the next 3 years, however it may be difficult to do this for the next 10. When considering a fixed rate loan remember to include the lenders rate lock fee. This may allow you to select the fixed rate on offer at the time of application as opposed to the rate on offer when your loan settles some time later.
Many lenders offer “split loans” which can combine the flexibility of both variable & the budgeting advantages of a fixed loan. (see combination/split home loan) [top]
INTRODUCTORY / HONEYMOON RATE HOME LOAN
These are variable rate home loans with a discounted interest rate for an introductory period, generally the first 6 to 12 months of the home loan. Commonly, lenders will use this product in their advertising as the introductory rate on offer can be significantly lower than their standard variable rate which the loan will revert to later.
After the 'honeymoon' period, the interest rate will automatically roll onto the standard variable. Some lenders may offer a fixed & or a variable introductory rate during the honeymoon period.
The obvious advantage is the lower interest rate which reduces your repayments, and gives you the opportunity if you choose, to pay more of the principal as quickly as possible.
The disadvantages are that once the 'honeymoon' period is over you are usually left with a less than competitive interest rate, and there may be higher exit fees. This also means that your repayment amount will likely increase after the discount period which needs to be budgeted for. Canfinance usually compares the different types of loans over a set period (say three years) this will help you decide if the initial rate discount on offer has a meaningful benefit compared to other loan types.
Also, it is important to know the exit fees and switch fees (fee incurred when you change home loan products) so you are aware of the costs to secure a better interest rate once the honeymoon period is over. [top]
LINE OF CREDIT HOME LOAN
A line of credit is an approved limit of money you can borrow secured by a property (investment or owner occupied). It is a very flexible loan and gives you the choice of paying interest only, principal and interest and in some cases allowing interest to capitalize until you reach your credit limit i.e. you use the funds available in the line of credit to pay the interest charges.
Essentially a Line Of Credit can be likened to a big Credit Card, with any repayment you make being able to be re-borrowed (drawn) back up to the limit.
There are two types of 'line of credit' and it is important to know which one you have.
The first has a standard 30 year term with interest only repayments being available for 1-10 years depending on the lender, after which the lender will require principal and interest repayments over the remaining term.
The second is what is often referred to as 'evergreen' or 'true' line of credit in that it has no 'actual' term, and as long as you are conducting the facility according to the lenders terms and conditions you will only ever have to pay interest on the outstanding balance.
A line of credit facility is popular with property investors and those who are financially responsible and can stick to a budget. Whether you are building a property portfolio and like the convenience of having your loan approved and waiting, or are renovating and only having to pay interest on the funds you have drawn down as your project progresses, or you're simply wanting to pool all of your income into your line of credit in an effort to pay your home loan off faster - this facility suits a variety of circumstances, but is definitely not for those who lose track of their finances quickly. [top]
COMBINATION/SPLIT HOME LOAN
This allows you to take part of your home loan variable, and part fixed or part principal and interest and part interest only.
When splitting your home loan between variable and fixed it gives you the advantages of fixing into a rate and having the comfort of knowing that portion of your home loan will not change should interest rates go up, while still having the full flexibility on the variable portion. Of course your variable portion is still vulnerable to interest rate changes and will rise and fall as set by the Reserve Bank of Australia & the individual lender margin. If interest rates fall, your fixed portion will not.
As it is important to check the interest rate your fixed portion will revert to & the fees and charges associated with splitting your home loan, Canfinance can do this for you as well as explaining rate lock fees on the fixed portion of your home loan. [top]
CONSTRUCTION HOME LOAN
The construction home loan is similar to a residential home loan except the property used as security is yet to be built. The loan is drawn down in progress payments (usually 5 or 6) in accordance with the stages in your building contracts.
After construction is complete you may have the option to switch to a different product that meets your needs. Some lenders charge 'progress fees' to cover the valuation at each stage. [top]
BRIDGING HOME LOAN
Bridging finance is a short term loan that covers the gap between the purchase of a new property and the sale of the old property. Lender policies on bridging finance vary significantly so it is important to know exactly what is required under the credit contract e.g. Loan servicing requirements, loan term, and allowing interest capitalisation. There is a certain amount of risk involved in bridging finance, so it is important to allow for worst case scenarios. [top]
LOW/NO DOCUMENTATION HOME LOAN
The Low or No documentation home loans are commonly referred to as low doc or no doc home loans.
These facilities have been designed to make the home loan application for self employed (and in some cases PAYG employees) that do not have their current income and taxation details available for the home loan application.
Low doc and no doc home loans have become increasingly popular, and therefore very competitive - to the point where most lenders, traditional and non traditional have a low doc product or policy.
The majority of lenders will only lend up to 80% of the property value under low doc policy. There are a few who will lend higher amounts, however these facilities can be more expensive due to the increased risk to the lender.
Lenders mortgage insurance may also payable when you borrow over 60%, however there are some lenders who will cover “capitalise” the LMI premium for you - so it is important to know who will and who won't and to consider this when choosing a home loan. Those lenders that do capitalise the mortgage insurance premium will often attract a higher interest rate, so comparing them against each other can be very important. [top]
CREDIT IMPAIRED/NON CONFORMING HOME LOAN
These facilities are for people who for a range of circumstances have a bad credit rating. Anything from not paying a phone bill to bankruptcy is noted on your credit rating for lenders to see (see credit rating).
Non traditional lenders provide products for people with a poor credit rating. The interest rates vary significantly depending on the level of risk the lender sees in funding your loan. [top]
EQUITY RELEASE/REVERSE MORTGAGE
A reverse mortgage or equity release mortgage has been designed for home owners over a certain age (normally 60) to access equity in their home to help fund their retirement without having to sell their home.
It is important to make sure the lender is a member of SEQUAL. Products vary according to flexibility and the amount you can borrow, as well as how the funds are paid to you - so make sure the lender you choose suits YOUR needs.[top]
