When looking for the perfect home loan, you need to have a clear understanding of 2 basic principles: The loan principal – which is the amount you borrow, and the loan interest – the amount you pay to borrow the money. Most lenders will align their loan types around these 2 principles. Here are some of the most common types of loans you will encounter when dealing with home loans.
This loan type has the interest and repayments fixed for a certain period, usually between 3 – 5 years. This allows you to draw up a consistent budget without any changes to your repayments. Although fixed loans provide you that certainty, interest repayments will never change even if the market rates drop. You cannot redraw and make extra repayments on a Fixed Loan.
Currently the most popular loan type in Australia, this loan type allows for varying interest rate payments depending on the lender. Changes to the interest rate will affect your loan – If the Interest rates drop, so will your repayments. If the Interest rates go up, so will your repayments. The good thing about Variable Loans is that you can create a budget plan where you can make extra repayments, shortening the term of the loan.
Split Loans are blended loan types that provide you the flexibility by combining Fixed and Variable options in one loan. This allows you to shorten the loan term by making extra repayments, but you still run into the risk of increasing repayments when the interest rates go up, affecting the Variable portion of your loan.
Lo – Doc Loans
Lo – Doc allows home buyers to secure a home loan even if they don’t have the necessary financial documents. Lo – Docs can either be Fixed or Variable. This helps people secure a loan, but also charges higher than other loan types. Repayments usually decrease after a few years if paid on time.
Line of Credit
Line of Credit allows you to draw from a fixed amount for home, shares, or any other asset types. This loan type provides you the extra funds, but with your home as security for the loan. You only pay interest on the funds you use, and can be accessed like a normal savings account.
Also called Reverse Mortgage, this allows people over 60 to gain access to equity on the property. Although no repayments are made, monthly interest accrued has to be paid when the property is sold.
To find out what loan type is the best for you, consult a certified financial planner. Home loans should help ease the burden and should not cause you financial stress when securing the home of your dreams.