There are many different types of home loans offered by Australian mortgage lenders. The range is so huge that looking for the right loan can leave many prospective borrowers, particularly first time home buyers, feeling confused and disoriented.
Here’s a quick look at the major mortgage lending options for property buyers.
Variable Interest Rate Loan
This is the most common type of home loan. As the name suggests, the interest rate can vary, going up or down depending on the interest rates set by the Reserve Bank of Australia (RBA). Borrowers are hopeful that when the RBA cuts interest rates, their mortgage rates will drop too, resulting in smaller repayments.
Unfortunately, when the RBA announces a rise in the interest rate, mortgage providers are often quick to increase their interest rate too. However, when the RBA reduces rates some lenders may not pass on the full amount. Contact the lender and ask for a lower rate whenever interest rate cuts are announced by the RBA.
There are two types of variable rate home loans – standard and basic. Standard variable rate loans offer features such as offset accounts, redraw facilities, extra repayments and loan portability. Basic variable rate loans are cheaper but lack the features offered by standard variable rate loans.
Fixed Interest Rate Home Loan
Borrowers who choose fixed rate home loans can fix the interest rate for a specific period of time, from a few months to several years. So even it the RBA announces an interest rate increase, those with this loan will only need to pay the same amount of repayment every month for during that time. Conversely, if interest rates drop, they will be stuck with paying more than borrowers who have taken out variable rate loans.
When the fixed term expires, the borrower can fix another term or opt for a variable rate loan. The mortgage lender may charge a penalty fee if the borrower wants to renegotiate the loan. For example, change it into a variable rate loan during the fixed term or make extra repayments to save on interest.
Split Loan
This is essentially a part variable and part fixed rate home loan. The borrower knows exactly how much to repay each month on the fixed rate part of the loan during the fixed term. At the same time, he also enjoys the flexibilities and other features offered by the variable interest rate part of the mortgage. The loan can be split by getting two separate mortgages on the home with the same lender or two different ones.
Capped or Introductory Loan
Also referred to as honeymoon loans, capped or introductory home loans are appealing to first time home buyers because of the lower interest rates they offer in the short term, often the first 12 months of the loan period. The rate may be fixed lower than normal fixed rate loans or may move up and down 1% or 2% less than the rates of variable rate loans.
The downside is that once the honeymoon period is over, the rate increases sharply, often even higher than rates of standard variable home loans.
Home Equity Loan
Home equity loans also go by the name line of credit or revolving line of credit loans. This type of mortgage allows the borrower to access additional funds by drawing on the equity of his home. It is packed features and facilities – easy access to funds through credit cards, check books, phone and online banking; withdrawal up the original limit without getting pre-approval; lower interest rates but higher credit limits than credit cards; savings on mortgage interest as income can be directed to the home equity loan (and as long as the income remains in the loan account until needed, it will save the account holder interest).
However, it also behaves like a transaction account with a giant credit card. Those prone to big impulse purchases should not take out a line of credit loan as it’s too easy to access the money. It is only suitable for borrowers who are extremely disciplined in managing their finances.
In recent years, many different types of home loans have emerged to suit the needs of different borrowers. Common lending options for home buyers include variable interest rate loans, fixed rate loans, split loans and capped loans. Home equity loans have also become very popular because of its multi-feature characteristic.
Found this article useful? Read also Non-Conforming Home Loans, Managing Rising Mortgage Rates and Choosing the Right Home Loan.
References:
eChoice Website – Home Loan Types
Gill, Harj. How to be Mortgage Free in 4 Easy Steps. Perth: Mortgage Free Australia, 2001.
