Whether you’re thinking about purchasing your first home, your forever home or hoping to invest, it’s important to know the different types of home loans available.
Here is an easy guide to the common types of home loan options in Australia.
Variable Rate Loans
Variable-rate loans are the most common type of home loan in Australia. Interest rates rise and fall over the course of a loan, depending on the official rate set by the RBA. When paying a variable-rate loan, your regular repayments pay off both the interest and some of the principal of the loan.
Standard variable rate loans allow you to make extra repayments, where you can select to make additional payments throughout the duration of your loan to cut the length and cost of your mortgage. If interest rates fall, the size of your minimum repayments will too. When interest rates rise, the size of your repayments will, as well. To decide if a variable-rate loan is right for you and your property goals, be sure to consult a financial advisor.
Fixed Rate Loans
A fixed-rate loan means that the interest rate of your loan is fixed for a certain period, usually for the first one to five years of the loan. This means that your regular repayments stay the same, regardless of the changes in interest rates set by the RBA.
The benefits of a fixed-rate loan include being able to manage your household budget better during the fixed period as you know exactly how much you need to repay for a set period. Additionally, your regular repayments are unaffected by the increases in interest rates, however, if interest rates go down, your regular repayments stay the same.
Interest Only Loans
When repaying an interest-only loan, you repay only the interest on the amount borrowed. This is usually for the first one to five years of the loan, although some lenders offer longer terms. Because you’re not paying off the principal, your monthly repayments are lower and at the end of the only interest-only period, you begin to pay off both principal and interest.
This type of loan is popular with investors, who endeavour to pay off the principal when the property is sold, having achieved capital growth. A benefit of an interest-only loan is that your repayments are lower during the interest-only period, however at the end of the interest-only period, you have the same level of debt as when you started to repay the loan.
Guarantor Loans
A guarantor loan can help first-home buyers get into the market sooner. A guarantor in a mortgage is a person who provides additional security on a home loan. Most financial institutions prefer the guarantor to be a close relative.
Say you’re hoping to purchase a home that costs $600,000. You have saved a deposit of $60,000, which is equal to 10% of the property value. For this particular loan, you require a 20% deposit and instead of saving an additional $60,000, a guarantor may offer to pay $60,000 of their own home equity as additional security for your loan.
A guarantor is not required to make additional repayments on your loan, however, if you are unable to make your repayments, the lender will turn to the guarantor to make the repayments.
Split Rate Loans
A split-rate loan means that your loan amount is split, with one part being variable, and the other being fixed. With a split loan, you get to decide alongside your financial advisor which proportion of the loan is variable and fixed.
A benefit of a split-rate loan is that your regular repayments will vary less when interest rates change, which allows you to manage your household budget easier. When interest rates rise, your regular repayments on the variable portion will too, which is important to regard if you’re considering choosing a split-rate loan.
Finding the right home loan for you is an important part of your property journey. There are many different types of home loans, and it is important to consult with a financial advisor who can assist you with making educated and informed decisions when choosing a loan.
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