If you’re not in the industry choosing a home loan that suits your requirements can be tricky. We always recommend using a proffessional who understands the ins and outs. But because education is everything and we’ve been there before, here is a 2 minute break down to add some clarity.
1. Variable Rate Loans
One of the most popular loans for home buyers when choosing a home loan, the amount of interest payable on a variable rate loan is dependant on the cash rate set by Reserve Bank of Australia.
Pro’s
- Extra Payments – Option to pay off sooner by allowing you to pay more than regular monthly payments, saving on interest and allowing for a shorter loan term
- Redraw – As you pay off the loan, you can reborrow some of the money you’ve paid if needed. Might come in handy for the backyard deck you keep talking about or a trip to Bali
- Offset Account – This is a backup payment option when you place a percentage of your income into the account to minimise from your loan principal further reducing interest
- If you find a better home loan most Variable rate loans don’t have an exit fee
Con’s
- Rate’s can fluctuate higher if changed by the RBA
Choosing a Home Loan Number 2: Fixed Rate Loans
This type of loan locks in a set interest rate for an agreed upon period of time. Usually 1 to 5 years at a rate above the current variable rate. Generally used by borrowers on a budget or not looking to risk changing rates.
Pro’s
- Don’t have to cope with extra payments
- Can easily budget to accommodate constant repayments
Con’s
- Higher mortgage rates
- No extra payments
- Harder to switch loans (Often exit fees)
3. Interest Only Loans
A popular choice for investors looking to utilise negative gearing or to sell the property again to make a profit through capital growth or renovations. This variation allows you to only pay the interest minus the principal for a set period.
Pro’s
- Allows for smaller repayments usually for first 7 years
- Could benefit younger buyers and low income earners with minimal cash whilst waiting to generate more income
Con’s
- Usually only lasts 7 years
- After that borrower will need to pay down principal and interest
Choosing a Home Loan Number 4: Guarantor Loans
This type of loan allows borrowers looking to borrow more than 80% of the property price who don’t have a deposit to use a portion of a family members home as a security for their own mortgage.
Pro’s
- Can allow first home buyers to get a foot in the door
- Avoids extra costs of Lender’s Mortgage Insurance (LMI)
Con’s
- Putting the risk on a family member/ parents should you default on the loan
- Banks will seize family members property to recover losses if needed
5. Low-Doc Loans
Short for “Low-Documentation” loans is often used by self-employed, business owners, freelancers or anyone who doesn’t have standard papers such as payment slips etc that are usually required when filing a loan application.
Pro’s
- Allows more flexibility
- Gives people without standard documentation an option
Con’s
- Generally have higher interest rates
- Often involve extra fees
Need help figuring out where you stand. The Australian Governement’s Money smart website has some great free resources including this Mortgage Calculator to get you started.
And if you are enjoying some very quick skill upgrades you might enjoy this article with some great Proven Investment Advice
