Types of home loans
There’s a wide scope of home loans to choose from so it can be difficult to understand all their features and whether they would be the best option for you. In this blog entry I provide a brief rundown of the different types of loans.
Fixed rate home loans
A fixed rate home loan lets you set (or fix) your interest rate for a certain amount of time. It’s usually anywhere between 1 to 5 years. It’s a great option for those borrowers who need more certainty when it comes to what their repayments will be each month. This is due to the interest rate not fluctuating during the term of the fixed loan.
The downside of a fixed loan is that if variable interest rates drop you won’t enjoy the benefit as you’re locked in on a fixed interest rate.
Fixed rates can be very inflexible loans too. They tend to lack common features such as the ability to link up an offset account, make unlimited extra repayments or redraw from the loan. If you close the loan during the fixed period, either form refinancing or selling your property, then you may have to pay high break costs.
If you do decide to go with a fixed home loan your mortgage broker will discuss the option of “rate lock” with you. Rate lock is a feature that lenders offer which guarantees that you’ll obtain today’s fixed rate on the day your loan settles. If you don’t rate lock you’ll obtain whatever the fixed rate is on the day of settlement which could be higher, lower or the same. Rate lock does come at a financial cost though and it can be quite expensive – with a lot of banks charging a percentage of the loan amount which is usually 0.15% or a fixed fee of around $750.
Variable rate home loans
Variable rate home loans have an interest rate that will move and up down depending on market movements. Typically, the rate movements aren’t too frequent and usually occur once the Reserve Bank of Australia makes their interest rate announcement each month or when lenders face tighter funding pressures.
When your lender increases your home loan rate you’ll end up paying more for your loan. On the flipside – when they drop interest rates you’ll be paying less for your mortgage.
Variable loans are generally more flexible then fixed loans. They often come with a range of features such as an offset account, ability to make unlimited extra repayments and redraw from your mortgage. These features can help borrowers pay off their loan quicker.
A fixed and variable combination
It’s possible to split your loan into two and have a portion set up as a fixed rate loan while the other is set up as a variable rate loan.
Splitting up the loans provides you with the best of both worlds. You will obtain some level of repayment certainty with your fixed rate loan and be able to take advantage of the flexibility of the variable rate loan. It’s also a way of hedging your bets when it comes to interest rate movements. If interest rates drop, you will benefit from having some of the loan set up as variable. If interest rates go up, you will benefit from having some of your mortgage fixed.
Professional package home loans
Most lenders offer some sort of professional home loan package. These loan packages usually come with three facilities – your mortgage, an offset account and a credit card. When it comes to professional packages, most lenders will provide a “life of the loan” rate discount off their advertised Standard Variable Rate (SVR) which we will negotiate for you.
Professional package loans typically come with an annual fee that ranges from $300 to $400 per annum.
Construction home loans allow you to draw down on your home over the stages of construction. Repayments are normally set up as interest only for the first year and then revert to principal and interest after.
To take out a construction loan the borrower usually needs to have a fixed price contract created with a registered builder and council approved plans. We then take that information to the lender you’ve decided to obtain finance with and they will order an “on completion” valuation of your property. This valuation will determine the estimate value of your construction project once it’s completed. This is the value that the lender will loan against.
Construction loans can be quite confusing for the uninitiated.
Non-genuine savings loans
Banks generally want to see evidence that the borrower has saved their deposit over a period of time. However, if your deposit is coming from another source such as an inheritance or a financial gift from family then some banks will still be happy to lend. It all comes down to the size of the gift or inheritance and the banks policy when it comes to non-genuine savings.
We don’t set up many line-of-credit loans these days. They were popular in the past but now they’re usually more expensive than a standard variable term loan which can often provide the same features/benefits of a line-of-credit.
A line-of-credit is usually also called an “equity release loan” – it’s when the borrower taps into the equity in their home to access funds. Those funds are typically used for investing or personal purposes such as renovating.
About the author: Jamie is the owner and founder of Pass Go Home Loans and operates between the Noosa and Canberra offices. If you’d like Jamie to provide you with some credit advice – just complete and return this FORM
This information is not intended to act as financial, investment, legal, accounting or taxation advice – and for that reason should not be relied upon as specific advice for your situation. You should always obtain independent, professional advice prior to making any financial, investment, legal or taxation decisions.