There are hundreds of home loan products on the market, each with different names, offering different features and with different rates and fees. To keep things simple, see below a list of home loan types.
A Standard Variable can be classified as ‘fully featured’ home loan with lots of flexibility. The flexibility comes from options like off-set accounts, redraw, and the ability to make extra repayments. A standard variable means that the interest rate will fluctuate with the market, therefore the loan interest rate can increase or decrease.
A Fixed Rate home loan has less flexibility than a Standard Variable loan. Some lenders do not offer redraw for fixed rate loans and usually limit making extra repayments. The interest rate is locked for the agreed period; if interest rates do decrease, the repayments will remain the same. There may be extra costs to remain on a fixed rate once the original period has ended.
Honeymoon or 6-12 Month Discount
Also called an Introductory loan, this type of loan includes a discounted rate for a period of time (normally 6-12 months). The interest rate for the period is very low, but once the period expires the interest rate switches to the standard variable rate.
Low Document Loan
Low Document loans are normally for self-employed or business owners who do not have their tax returns and can not prove their income. This type of loan normally requires a letter from the accountant and a signed declaration. Generally no more than 70 – 80% of the property’s value can be borrowed.
This is generally a standard variable product with the option to revert to another product after the construction is completed (normally at a cost). Portions of the loan will be funded/released at every interval of the construction. This will happen approximately 4-5 times (e.g. laying of the foundation, erection of walls, etc). At the end of construction there will be final inspection to check the completed construction.
Interest Only loans refer to the repayment type being interest only, as opposed to principal and interest. Depending on the lender, a maximum period of 15 years is allowed, prior to reverting to principal and interest. This type of loan often suits investors wanting to use the rental income to cover a larger portion of the loan repayments. It can also be used by borrowers that may have lost their job, as it helps ease the pressure of making full repayments.
Split Loans generally include Fixed and Variable portions e.g. 50/50, 25/75 etc. A split loan provides flexibility, gives the option of making additional repayments, and helps ease the pressure of interest rate rises. Depending on the lender, a fee to split the loan may apply. Some lenders allow multiple splits – a useful tool for investors.
Non-conforming loans are for borrowers that do not ‘fit into’ the traditional lenders’ guidelines. These loans do come at higher rates, however they offer another choice. Rather than miss out on the property, it allows the buyer to enter the market. Non-conforming lenders accept a broad range of income types, periods of employment and credit impairment.
Line of Credit
Line of Credit can be considered as a big credit card. This works on the same principles of a credit card – pay for what you use and continue making monthly repayments. It can be ‘maxed’ out, paid back, and ‘maxed’ out again. The repayments are interest only.
A Line of Credit works well for investors who need access to cash quickly, investors who renovate and then sell, self employed people or business owners. Be aware if only minimum repayments are made then only the interest is being payed off and at the end of the loan period the amount owing has not decreased.
An offset account is a transaction account linked to an eligible home or investment loan. The money you have in this account can offset the amount you owe on that loan and you will be charged the interest on the difference.
Offset accounts are effective when you have regular savings pattern or lump sums deposited. Offset accounts will not suit someone who wishes to reduce the loan balance or reduce the monthly repayments.