There are different types of home loans and each have its usually pros and cons. When you search for a mortgage, it is evident that you will be overwhelmed when you discover a wide range of home loan options available to you to choose from.
Therefore, you will surely be better off when you have a little help and guidance to narrow down your search and choose the right type of home loan according to your need, your financial situation and preference, Here are the main types of home loans available.
Variable interest rate
The first thing to consider when you compare home loans is the type of interest rate that you would like to avail. One of the most popular type of interest rate is the variable rate. This rate is determined by the lender and can be changed at any time, depending on the market conditions and the governing rules.
Ideally, lenders will shift their variable rates due to the changes in the official cash rate made by the Reserve Bank of the country.
The peculiarity of this type of interest rate is that:
You gain when the interest rates are low and
You are also vulnerable to the increase in interest rate.
In spite of this risk, the variable rate home loans are popular because:
These loans generally provide more flexibility to the borrowers allowing them to switch loan providers when they like
They will not have to incur a break cost fee in the process which is most often charged with the fixed rate loans and
The borrowers can take advantage of different features such as 100% offset account facility. This will help them to reduce the amount of interest paid.
However, when you go for a variable rate home loan, make sure that you punch in your details into the rate change calculator to see whether or not you can afford a rate increase reasonably.
Fixed interest rate
The substitute to a variable rate home loan is the fixed interest loan wherein you lock-in the rate either for the entire term of the loan or for the introductory period that ranges between 1 to 7 years, depending on the lending policy of the lender.
The unique features and advantages of a fixed rate home loan are:
The repayments will remain constant during the loan term fixed
These are ideal for first home buyers or borrowers living on a strict budget
The rates are usually higher than variable rates
It is hard to switch such home loans during the fixed rate period and the lenders may charge a high exit fee
You may lose out on a few flexible features such as 100% offset account, but the good thing is these days many fixed rate loans come with an extra repayments facility.
However, when you go for this type of home loan keep in mind that longer the fixed rate term, higher will be the interest rate.
Split interest rate
There is another type of home loan that is in between variable and fixed interest rates. You can split your home loan interest. In such method you lock-in a portion of your loan as fixed and leave the remainder as variable. This means that:
The portion that you fix will not be subject to any changes that may come up in the market while
On the variable portion you will be able to take advantage of the features like offset account.
The ratio for fixed and variable portion will ideally depend on your choice and the amount of risk you want to take on.
The type of home loan you get will depend on other factors such as whether you are an owner occupier or an investor.
Recently, the regulatory boards of the government have put pressure on the banks to reduce their investment loan portfolios. Therefore, some of the lenders are increasing the rates and lowering the maximum loan to value ratio requirements for the investors.
Therefore, if you are an investor and have a low deposit, that is to say you have a high LVR, you may not qualify for the same type of loans as someone buying as an owner occupier.
Even if you manage to get one, you will need to budget for a higher monthly repayment because it will carry a steeper interest rate.
Interest only loans
If you want to bring down your monthly repayments one of the best ways is to opt for an interest only home loan.
According to the rule, in these types of loans you will need to pay down only the interest for a specific period.
Typically, an interest only home loan will drop down your monthly repayment by more than thousand dollars.
This naturally is one of the most popular types of home loans for the investors. This is because of the negative gearing that will allow them to get a refund on the interest when they file in their tax return.
However, you must choose this option only if you know for sure that the property you purchase will grow in value. Another important thing that you should keep in mind is that the interest only period will not last forever. It will usually be for up to 7 years, depending on the lender, after which you will have to pay down both the interest along with the principal.
Few other types
You can also choose from a variety of other different types of home loans as well.
You can choose a low deposit loans if you are an owner occupier with as less as 5% deposit.
You may also choose guarantor loans wherein you can put a security for the loan.
Low doc home loans are another type that you can choose especially if you are a freelancer or own a business.
Of course, there are line of credit loans that you can avail if you have equity on your home. With all these options available, you can surely find one according to your suitability.