Different Loan Types
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A new home or a new loan. Which is easier to find?
When you’re looking for a new home you probably have a good idea of what you’re looking for – what it looks like, what size it is, even where it’s located, maybe even right down to the street. But when it comes to a loan, where do you start? There are hundreds of loans from a huge choice of lenders. And there are new products coming into the market all the time.
As a broker, our job is to help you find one loan out of the hundreds available that suits your individual needs. What’s more, we’ll help manage the whole process for you. We’ll assist you with the paperwork, and manage the application process right through to approval.
Of course with all loan products there are pros and cons, so it’s a good idea to get familiar with the different loan types. Here’s a quick look at the main types of loans and some of their advantages and disadvantages.
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Loan Types
Find quick info on the type of loans available to you.
Variable
Standard variable loans are the most popular home loan in Australia. Interest rates go up or down over the life of the loan depending on the official rate set by the Reserve Bank of Australia and funding costs and the individual decisions of each lender. Your regular repayments generally pay off both the interest and some of the principal.
You may also be able to choose a basic variable loan, which offers a discounted interest rate but has fewer loan features, such as a redraw facility and repayment flexibility.
Pros
- If interest rates fall, the size of your minimum repayments will too.
- Standard variable loans generally allow you to make extra repayments. Even small extra payments can cut the length and cost of your mortgage.
- Basic variable loans often don’t come with a redraw facility, removing the temptation to spend money you’ve already paid off your loan.
Cons
- If interest rates rise, the size of your repayments will too.
- Increased loan repayments due to rate rises could impact your household budget, so make sure you take potential interest rate hikes into account when working out how much money to borrow.
- You need to be disciplined around the redraw facility on a standard variable loan. If you dip into it too often, it will take much longer and cost more to pay off your loan.
- If you have a basic variable loan, you may not be able to pay it off quicker or get access to money you have already repaid if you ever need it.
Fixed
Fixed interest rates are where you lock in your interest rate for a certain period of time. This will mean your regular repayments will be the same for the fixed period. These periods generally are anywhere from 1 – 5 years with some lenders doing longer fixed terms.
After your fixed term, you will then generally revert back to the variable rate and this is when we would look to review your loan and see what is best for you moving forward.
Every fixed loan is different with each different bank however most fixed loans do not have the features of variable such as offsets, redraw and you may be penalised for making extra repayments.
Pros
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If interest rates rise change your rate will stay the same
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You can choose how long you take a fixed term
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This will make it easier for you to budget having the certainty of what your rate will be each week
Cons
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If interest rates fall then you will not benefit from this
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You may be penalised for breaking the fixed term early
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You may not benefit from some features including offset, redraw, extra repayments, etc.
Split Rate Loans
Split Rate Loans are where you are able to split your loan into some being variable and some being fixed. The main advantage of this is that you get to take advantage of both of the loan types so please refer to Variable and Fixed above for more information.
Low Doc
Low Doc loans are for self-employed customers who may not be able to provide the financial information that the banks require. Only certain banks will offer low doc loans so please get in touch with us for more information about this.
Introductory/Honeymoon
These type of Home Loans may have an offer where for the first few years you receive a discounted rate, after which time your rate will increase. You will need to be mindful with these types of loans as they are a variable interest rate meaning your rate will still fluctuate with rate changes however your introductory/honeymoon discount off the standard rate will apply for the agreed period.
Line of Credit
Some banks will still allow you to have a line of credit. This is a variable interest rate that will be higher than most of the other rates offered by the bank, as a line of credit can be considered a riskier lending product. A line of credit allows you to go up to a certain credit amount, and will have interest charged each month out of the loan. It doesn’t usually have set repayments and as such it is not suited for most lending scenarios.