The process of buying a new home can be pretty overwhelming. There are so many different things to consider, from what type of property to buy to which location would be best and what kind of home loan you can get.
Understanding the type of home loans available to you on the Australian market will help you figure out what steps you need to take to get one set up. This guide will take you through the different home loans, along with the advantages and disadvantages of each.
Variable rate loan
A variable home loan is one where the rates are determined by your lender and can change over the course of your loan. While these loans broadly follow market conditions, the rates are not set by the Reserve Bank of Australia, so they won’t always go up or down when the cash rate does.
However, you will still find that you will pay lower repayments some months, and higher repayments in other months. This uncertainty can put some people off, as it can make it harder to budget for. It can be a bit of a gamble, but the main benefit is that it offers borrowers flexibility, which is why these types of loans tend to be the more popular option.
If you want to switch providers, you can do so without having to pay a break cost fee, and you usually have the option of paying your loan faster through things like:
- Extra repayments: If you ever want to pay more than your monthly repayment fees, an extra repayments facility allows you to do so. This will shorten the duration of your loan, thus saving you money on interest.
- Offset account: Another great feature is an offset account facility that can help you reduce the amount of interest you pay on your loan.
- Redraw facility: This facility allows you to borrow some of the money you’ve repaid in extra repayments, so you have access to funds if you suddenly need money.
Fixed rate loan
As the name suggests, fixed-rate loans guarantee a fixed interest rate for the duration of the agreement, which is usually between one and fifteen years. The good thing about going for a fixed rate is that you don’t have to worry about the rate going up over time, which makes it a great option for those on a budget or if you think that interest rates are likely to increase.
The fact that you pay the same amount every month means that in many cases you don’t get the benefits you enjoy with a variable loan, such as extra repayments. If interest rates decrease while you are paying your fixed rate, then you will simply miss out.
Another downside is that the rates are typically set higher than for variable ones, and if you want to try and change loans, you may find it more difficult to do so and face paying a hefty break cost fee if you attempt to refinance while in the fixed rate period. Of course, you may get lucky and end up paying less than the variable term if interest rates rise.
Lastly, you will generally find that the longer the fixed rate term, the higher the interest rate will be. So, you may start off paying a lower fixed rate, but each year this will increase. Be sure to keep this in mind and budget for the higher fees.
When it comes to choosing between a fixed rate and a variable rate, there really is no right or wrong answer. Some people prefer the security of knowing how much they will be repaying each month, whereas others prefer the idea of paying market rate.
Split-interest rate loans
If you’re finding it difficult to choose between variable and fixed rate loans, then you may want to consider a split rate home loan. These let you fix a portion of your loan, while the rest is left variable.
This will allow you to benefit from features like an offset account while offering the stability and peace of mind of a fixed rate for a portion of your loan. Of course, you will still have to deal with the drawback of being on a variable rate, which is that it can go up at any time.
Interest only loans
With your typical home loan, your repayments will consist of paying back both what you owe, plus interest. These types of repayments are known as principal and interest repayments. However, you can get loans where you only pay the interest for a set period.
The benefit is that you face lower repayments during this time, however, you be reducing the principal amount owed, so you end up paying more in the long run. Interest-only periods usually last up to seven years, by which point you will need to start making principal and interest repayments.
>Low deposit loan
If you can’t afford the typical 20% deposit, then you may be able to get a loan with just a 5% deposit if you are buying your first home and plan to live in it. The downside is that you will likely have to pay for lenders mortgage insurance, which covers the lender’s loss if you are unable to make repayments.
If you’re eager to get your foot on the property ladder but need some help to improve your chances of being approved for a home loan, then a guarantor loan may be an option for you. This would involve asking a parent or other family member to be a guarantor, meaning a portion of their home would be used as security.
The advantage is that you can avoid the cost of lenders mortgage insurance and buy a home sooner, but you and your guarantor will need to weigh up the risks involved should you default on the loan.
Low doc home loans
If you are self-employed, then you won’t have the same documentation as others, like pay stubs or a letter from your employer, so you may be best off applying for a low documentation home loan.
With these, you don’t have to provide the standard paperwork, but instead, submit other documentation such as bank statements and business activity statements. The downside? You will likely face higher interest rates.
Having a basic understanding of the types of home loans available on the Australian market can help steer you in the right direction, but it’s always a good idea to get some specialist advice from a mortgage broker or financial advisor who can explain the options to you in further detail and help you gain a better understanding of what type of loan would be right for you.
About the Author
Sofia is a passionate writer from Sydney. She also enjoys decorating houses and engaging in home renovation projects. That is why she loves sharing her experience and advice with other people through her writing. Besides this, she loves technology and gadgets which can help us get through a busy workday. You can contact Sofia on Facebook and Twitter: