Different Loan Types
Finding the right home loan is as important as finding the right property.
There are literally hundreds of home loans available, with new products emerging all the time.
As a broker we can help you find a loan that suits your particular needs, help you complete the paperwork, professionally package it with your supporting documents and submit it to your chosen lender.
Here’s a snapshot of the main types of home loans and some of their pros and cons.
Variable
Standard variable loans are the most popular home loan in Australia. Interest rates go up or down over the life off the loan depending on the official rate set by the Reserve Bank of Australia and funding costs. Your regular repayments pay off both the interest and some of the principal.
You can also 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 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 won’t be able to pay it off quicker or get access to money you have already repaid if you ever need it.
Fixed
Pros
Your regular repayments are unaffected by increases in interest rates.
You can manage your household budget better during the fixed period, knowing exactly how much is needed to repay your home loan.
Cons
If interest rates go down, you don’t benefit from the decrease. Your regular repayments stay the same.
You can end up paying more than someone with a variable loan if rates remain higher under your agreed fixed rate for a prolonged period.
There is very limited opportunity for additional repayments during the fixed rate period.
You may be penalised financially if you exit the loan before the end of the fixed rate period.
Split rate loans
Pros
Your regular repayments will vary less when interest rates change, making it easier to budget.
If interest rates fall, your regular repayments on the variable portion will too.
You can repay the variable part of the loan quicker if you wish.
Cons
If interest rates rise, your regular repayments on the variable portion will too.
Only limited additional repayments of the fixed rate portion are allowed.
You will be penalised financially if you exit the fixed portion of the loan early
Interest Only
Pros
Lower regular repayments during the interest only period.
If it is not a fixed rate loan, you have the flexibility to pay off, and often redraw, the principal at your convenience.
Cons
At the end of the interest only period you have the same level of debt as when you started.
If you’re not able to extend your interest-only period, you could face the possibility of increased repayments.
You could face a sudden increase in regular repayments at the end of the interest-only period.
Line of credit
Pros
You can use your income to help reduce interest charges and pay off your mortgage quicker.
Provides great flexibility for you to access available funds.
You can consolidate spending and debt management in a single account.
Cons
Without proper monitoring and discipline, you won’t pay off the principal and will continue to carry or increase your level of debt.
Line of credit loans usually carry slightly higher interest rates.
Honeymoon/Introductory
Pros
Lower regular repayments for an initial ‘honeymoon’ period.
Cons
Loans may have restrictions, such as no redraw facilities, for the entire length of the loan.
You may be locked into a period of higher interest rates at the expiry of the honeymoon period.
Low Doc
Pros
Lower requirement for evidence of income. May overlook non-existent or poor credit rating.
Cons
You will probably pay higher interest than with other home loan types, or may need a larger deposit, or both