Types of Home Loans

There are a number of different home loans and variations on home loans – it can all get a bit confusing. We’ve outlined the most common home loans below – but of course, feel free to schedule a catch up with our team to find out the best options for your unique circumstances.

PRINCIPAL + INTEREST LOAN

This is the most common type of home loan, and involves paying down the principal (the amount borrowed) as well as the interest. Over the full term of the loan, you will pay less interest as the balance is reduced by each payment. Principal + interest loans generally have lower interest rates.

 

INTEREST ONLY LOAN

Interest only loans are usually for a specified period (for example 5 years), and you pay the interest only – which means you end up paying more interest over the life of the loan.

The minimum repayments for an interest only loan are lower than a Principal + Interest loan, which may be useful if you’re trying to free up cashflow. However it’s important to be aware that, when the interest only period ends, your repayments will likely be higher. The interest rate may also be higher on an interest only loan. You can typically pay extra on interest only loans if it’s also a variable loan, just like if you were paying it as a Principal & Interest loan. The extra funds you pay will sit in your advanced payment or redraw account

FIXED RATE LOAN

With a Fixed Rate loan, your interest rate stays the same for a set period (for example 3 or 5 years). This makes budgeting easier as you know your set repayments, but you don’t get the benefit if interest rates go down during the term of your fixed loan. When the fixed rate period ends, the loan usually reverts to a variable interest loan.

VARIABLE INTEREST LOAN

The interest rates on Variable Interest loans can go up or down with market fluctuations, meaning you get the benefits of general rate declines. Variable interest loans also usually offer greater flexibility and more features (such as offset or redraw accounts), however more features can sometimes mean higher fees. With Variable Interest loans you can usually make additional payments without penalties.

SPLIT LOAN/PARTIALLY FIXED

A split loan (also known as a partially fixed loan) has a portion with a fixed rate and a portion with a variable rate.

LOAN WITH OFFSET ACCOUNT

An offset account is a transaction/savings account linked to your home loan. You can make deposits/withdrawals as you would with a normal transaction account. For example, you can have wages deposited directly and only take your costs as needed, or use the offset account as savings towards a larger expense (for example a car or holiday).

By holding money in this account, you can reduce the interest on your home loan, as the balance of the account is counted towards the principal. This can help you pay off your loan sooner. But you have the flexibility of access to the funds if needed.

An offset account is usually only available on a Variable Interest loan.

REDRAW ACCOUNT

Redraw facilities let you access any extra repayments that you have made on your home loan, allowing you to make additional payments knowing you can access the money if your circumstances change.

Note that you can only redraw excess payments – not your minimum monthly payments. But left untouched the extra payments help you to pay your loan off more quickly. The redraw sometimes costs a small fee – it all depends on the conditions of your loan.

GUARANTOR LOANS

If you don’t have enough of a deposit for your mortgage, a Guarantor Loan can give you an opportunity to get into the housing market with the help of a family member. It can also save you money by removing the need for Lenders’ Mortgage Insurance.

Your Guarantor (often parents) provide a guarantee using their property as security for the loan. Once you have paid off part of your loan (or the property has increased in value) you can apply to remove the guarantee.

There are conditions that apply to a Guarantor Loan, and some lenders may require you to have some savings (to prove your capacity to repay the loan). When combining the new property and the guarantor’s property, the LVR (Loan to Value Ratio) must be lower than 80%. This means that the amount of money you’re borrowing must be less than 80% of the combined value of the new property and the equity in the guarantor’s property.

Some lenders let you limit the size of the guarantee, so that your guarantors are only liable for part of the mortgage.

LOW DEPOSIT HOME LOAN

With a low deposit home loan, it is possible to buy a home with as little as 5% deposit. Low Deposit loans are a higher risk for the lender so they usually have extra eligibility criteria.

OWNER BUILDER LOAN

An owner-builder home loan offers flexible conditions that recognize the cashflow challenges of a major building project. The loan structure allows you to draw down the loan in installments, known as ‘progressive drawdowns’ or ‘progressive payments’, which means you’re only paying interest on the amount you’ve used.

They also offer repayments as interest-only during the build to help manage the budget.

Applications for Owner Builder loans usually need council plans and permits, insurance, and a payment schedule. With an Owner Builder Loan you can usually borrow up to 60% of the cost of the build.

CONSTRUCTION LOAN

A Construction Loan is similar to an Owner Builder Loan, but for a project using a registered builder.

They also offer progressive drawdowns and interest-only payments, but need the fixed price contract with the builder as well as the other loan requirements.

With a Construction Loan, using a registered builder, you can usually borrow up to 95%.

BRIDGING LOANS

Bridging loans are short-term loans that finance the purchase of a new property while you are waiting to sell your existing property (or build a new home while living in your existing property).

With a bridging loan you usually have 6 months to sell (or 12 months if you’re building a new home). Payments are generally on an interest-only basis. Typically the LVR (Loan to Value Ratio) needs to be below 80% for any lender to consider Bridging Loans. All banks differ so speak to our specialists to see if you’re eligible for this option.