10 Types of Home Loans.
Choosing the right home loan is much as important when choosing your right property. How would we know the right home loan? Remember that the right home loan is not always the one with the lowest interest rate. Each type of loan offers different features and benefits.
Take your time to avoid making poor decisions that could lead to mortgage stress. Learn more about the different types of loans.
Variable Rate Loans
Variable-rate loans are the most common type of home loan, which means interest rate varies over time. How does this mean? It means that your rate and repayments will drop when there is a dip in external interest rates, yet it will rise if there’s a spike in these rates.
Unpredictable interest rates are only part of the picture. Unlike the other loan types, homeowners who chose variable-rate loans can make additional repayments free of charge. It also offer access to an account and redraw facility, which allows borrowers to access these additional repayments at a later stage.
Fixed Rate Loans
This type of loan, allows borrowers to fix the interest rate at a certain level for a given period of time. It means it has fixed monthly repayments. With this, it is more easier to organize the budget and plan for the future than those with variable-rate loans.
Generally, fixed-rate loans are a good idea when rates are low and expected to increase in the near future. But borrowers should take into consideration their current financial situation when deciding which loan is right for them.
Split Rate Loans
Nowadays, many borrowers will fix a portion of their loan amount to lessen the risk whilst retaining some flexibility over the future repayments. With that, split-rate loans give the borrower the ability to do both- by putting extra repayments on the variable portion while having the stability of knowing what the fixed-rate is going to be.
Interest Only Loans
Mostly, this type of loan is usually offered to investors. Interest only loans are mortgages that allow the borrower to only pay off the interest and ignore the principal for a set period.
They can pay the minimum off their loan while waiting for the property to increase in value, where at some point they could sell it to cover the original loan amount and bank a profit.
For starters, most loans to investors require a higher loan-to-value ratio or LVR. This means that these loans come with higher interest rates. One of the benefits is that investors can deduct these additional borrowing expenses from their taxable income, in which one of the many ways to reduce tax bill.
Low Doc Loans
Since not all borrowers have the luxury to pay regular checks nor a clear defined capacity; this type of loan allows people to apply for a home loan without providing the standard amount of paperwork, yet in return for paying a higher interest rate and larger deposit.
Low doc loan interest rates are anywhere from 1-1.5% which is higher than the standard rate, with some lenders offering loans as high at 8%.
Low Deposit Loans
This type of loan allows aspiring owners to get a foot on the property ladder much sooner than they would have otherwise been able to. Lenders require borrowers with a deposit that is less than 20% of the property value to pay for lenders mortgage insurance, to protect the lender in the event when the borrower defaults on their loan.
You can choose a guarantor that takes on some of the risk of your loan by putting forward in their property as security. The bank lets you borrow and repay the money, if you default the loan, the lender could recover the debt from the equity your guarantor provided.
The guarantor can choose to offer as little or as much equity as they like. Guarantors would need to offer enough equity for the combined value of the equity they put forward and the borrower’s deposit exceeds 20% of the property value.
Line of Credit Loans
This essentially allows you to swap the equity you’ve built up. This loan is a complete reversal of the usual home loan set up, such as paying mortgage repayments in return for equity in your home. This is very useful for people who have built equity in their home and need cash flow boost temporarily.
However, home loans that offer the feature often have higher interest rates and administrative changes, so it is more important to sift through the fine print before signing up.
Full Feature Home Loans
If flexibility is essential for you as a borrower, then this is exactly for you. Generally in the form of higher interest rates and administrative charges, there is a price to pay.
It is very important to weigh up the benefits of the added flexibility against these extra costs and seek advice from a licensed financial advisor if you are unsure which loan is best for you.