There are hundreds of different home loans on the market, each with their own jargon and buzzwords.
It helps to know some of the key types of loans you may hear being discussed as part of your loan process.
No one loan type is better or worse than another. Each one depends on you and your unique situation.
FIXED RATE MORTGAGE
Fixed loans generally allow a borrower to lock in an interest rate for a particular period of time, normally 1-5 years. Customers who choose a fixed rate get the comfort of their repayments not changing during the fixed term. Fixing an interest rate does, however, mean a trade-off in respect of the flexibility of a loan. A fixed rate loan generally has more restrictions than a standard variable. Many fixed rate loans do not let you make extra repayments or restrict the additional repayments during the fixed period. Features such as re-draw or mortgage offset are usually not allowed during the fixed period.
STANDARD VARIABLE RATE HOME LOAN
Most Lenders offer a standard variable rate loan. The interest rate on these loans does exactly what the name suggests. It can vary with time depending on the market. Variable rates are based on official Reserve Bank rate and generally won’t change unless there is an official change. Variable loans include basic, standard, or revolving line of credit products and are traditionally the most flexible. Variable loans generally allow you to offset your mortgage, make extra repayments and have access to redraw. It also allows you to pay your loan out early.
BASIC VARIABLE HOME LOAN
This is similar to a standard variable rate loan, but without additional features such as offset and portability, etc. The interest rate is typically lower then a standard variable loan, making them attractive to people who are sure they won’t require the additional features. The major difference is that most organisations charge a fee to access redraw.
SPLIT RATE HOME LOANS
Split Loans are sometimes called “combination loans”. Splitting your loan can be an effective way to cover yourself against interest rate movements. You divide your loan into two portions – part fixed and part variable. The variable part of you loan will move when the market does, but the rate on the fixed portion of your mortgage remains static.
LINES OF CREDIT HOME LOANS
A revolving line of credit is essentially an overdraft where you can at any time draw the loan balance up to the original amount borrowed. Usually, minimum repayments on a Line of Credit facility are interest only. Lines of Credit often have higher interest rates than variable rate loans and can be a trap for those who aren’t good at budgeting. So if you want the flexibility but would prefer the safety of set monthly repayments, an offset facility is probably a better option.
Bridging finance allows the borrower to “bridge” the gap between the sale of one property and the purchase of another. This can be useful if the settlement date of the new property purchase takes place before the sale of the original property. If these two transactions are, say, 30 days apart, bridging finance can help fill that one-month gap.
INTRODUCTORY OR HONEYMOON RATE HOME LOANS
These are normally for self-employed applicants who either have not prepared their financials, or have lodged their financials but minimised their profit through their legally entitled cash and non-cash deductions (expenses).
The borrower is required to sign a statement confirming the loan repayments can be met from the businesses cash flow. Lenders with this style of facility usually charge a higher interest rate.
If you are over 60, own your home and need some extra cash, using the equity in your home, by way of a reverse mortgage is one option that may be available to you.
Doing this is a big step though. Your home is probably your most valuable asset so you must work out whether the benefits outweigh the risks.
Not everyone will be able to obtain this type of loan but our representative can work this out for you.