Which type of home loan is right for me?
Home loan types at-a-glance
An easy-to-read overview of home loan types. If you’re a first home buyer, looking to refinance or invest in property, there are several loan types on offer.
Rest assured, we’ll explain your options and help you choose the loan type that’s right for you
This will be based on careful evaluation of the features, benefits and extras that will best suit your financial position, lifestyle and home ownership goals.
But here’s an overview to get you familiarised with the options.
Fixed rate Loan
Fixed rate loans give you the benefit of knowing what your repayments are for a set period. Without having to worry about the effect of interest rate increases, a fixed rate loan can make budgeting easier since repayment amounts are the same each month.
However, additional repayments are not always allowed, and you may be charged a fee (break fee) to swap to a variable rate during the fixed rate period. After the expiration date, most fixed rate loans can be fixed again although some will revert to the lender’s standard variable rate.
Variable rate Loan
This is a flexible product with more features than a fixed rate loan such as offset accounts, redraw facilities and the ability to make extra repayments on your loan.
On the downside, a variable rate loan can be unpredictable. If interest rates fall you’ll benefit, but if they rise, so will your minimum repayments. If you’d rather the security of knowing what your monthly repayments will be, then fixing your interest rate would be a better idea.
As the name suggests, this is designed for those who don’t have access to the paperwork (e.g. financial statements, tax returns) usually required to apply for a home loan. With a low-doc loan, freelancers, the self-employed or small business owners can secure great home loan deals without formal documentation and enjoy the same features as a standard loan.
Line of Credit/Equity Loan
Access cash easily with this flexible loan type that enables borrowers to draw funds out of the equity in their home as and when it’s needed. LOC facilities can be useful for builders and renovators or those who want to build wealth by tapping into the equity in their property to invest in assets.
An LOC is similar to a credit card (with a lower interest rate and higher limit), and therefore requires a great deal of control and discipline.
Introductory Rate/Honeymoon Loan
The first year is typically the hardest for first home buyers. A loan with an introductory rate or honeymoon period offers a low fixed rate the first 6 or 12 months before returning to standard variable rate.
While this loan type will save you money on repayments for the first year of your loan, after the honeymoon is over, the revert rate may not be competitive in the current market. Exit fees may be charged for breaking a loan term early, and switch fees may be charged if you choose a fixed rate rather than standard variable rate after the honeymoon period is over.
If you’re a low risk buyer, you can enjoy the rewards offered by most major lenders in a Professional Loan. These special packages for borrowers taking a loan over a particular value (value varies from lender to lender) include additional features or benefits such as low interest rates and discounts on other lender products.
Construction Loan/Building/Renovation Loan
Building a home or renovating your existing home? With a construction loan, you can break up the drawdown of the loan into stages instead of getting the total amount of the loan on settlement. As one stage of construction is completed, you’re able to draw down the next chunk of the loan. This means you know that you’ll have the finances available for the project and that interest is only calculated on the portion of the loan you’ve drawn down and used.
Unfortunately, property sales and purchases don’t always happen simultaneously. A bridging loan tides you over between the purchase of your new home and the sale of your existing one.
Calculated by adding the value of your new home to your existing mortgage, then subtracting the likely sale price of your existing home, what’s left is called your ‘ongoing balance’ and represents the principal of your bridging loan.