With so many lenders and countless products under their brands, how do you know which home loan is right for you?
Before we dive into the different types of home loans, there are two very important things we need to understand first:
Types of interest rates
Most types of home loans will have these three options:
Variable interest rate
A variable interest rate is a loan with an interest rate that is influenced by market conditions. If interest rates go up, so do your repayments. If they go down, your repayments will, too.
Variable home loans don’t have the certainty that fixed-rate loans offer, but they have exciting features like the ability to make extra repayments – often without cost – to pay off your loan sooner.
Fixed interest rate
That name says it all. Fixed-rate loans will have a ‘locked’ rate for a certain period, usually between one and five years. With a fixed interest loan, you will know exactly how much your repayments will be. These types of loans offer certainty and security. The downside is that your repayments won’t decrease if interest rates fall.
Split interest rate
The best of both worlds. Part fixed, part variable.
With a split home loan, your repayments are split into a fixed-rate component and a variable-rate component. For example, let’s say you borrow $500,000, you can fix $300,000 and keep $200,000 variable. This sort of loan lets you enjoy the benefits of an interest rate drop and also protects you from being fully affected if they rise.
Principal and interest vs. Interest-only repayments
Home loans are made up of two parts: the principal and the interest.
- The principal is the initial amount you borrowed.
- The interest is the amount the lender charges you for borrowing the initial amount.
Most types of home loans will also have these two repayment options:
Principal and interest repayments
A very popular repayment option for most.
Each repayment you make reduces the principal, as well as the interest. So gradually, your repayments will be paying off more of the principal and less interest because you’re chipping away at the balance from the start.
Interest-only repayments delay the repayment of the initial amount borrowed – the principal – for a period of time. You only start paying off the principal at the end of that period.
During the interest-only period, your repayments will be significantly smaller, but over the life of the loan, you’ll end up paying more interest.
Types of home loans
Now that we’ve covered interest rates and repayment options, let’s look at some of Australia’s most common types of loans.
Owner-occupier home loans
Owner-occupier loans are for borrowers who will be living in the property for which the loan is being used to buy. As a result, they often have lower interest rates than other loans such as investment home loans.
Investment home loans
Investment home loans are for investors wanting to buy a property for investment purposes. Interest rates on these loans are usually higher as investors can have a higher perceived risk than owner-occupier borrowers.
One of the advantages of taking out an investment home loan is tax benefits, which include claiming loan interests’ payments as an investment expense.
Low-doc home loans
Low-doc loans are for borrowers that can’t provide proof of income documents needed for a conventional home loan. These loans are popular with self-employed borrowers and investors. However, the downside is that they usually have higher interest rates and/or require larger deposits as they are considered a higher risk by lenders.
Guarantor home loans
Guarantor home loans are suitable for those who cannot secure the full loan amount by themselves.
A guarantor is usually a close family member who can help secure the home loan by agreeing to take responsibility for making repayments in case the borrower can’t. Guarantors home loans are a great option for borrowers with low incomes, bad credit histories, or who are struggling to save for a deposit.
Refinance home loans
Refinance loans are regular home loans you can refinance to, whether with your current lender or a new one.
There are many benefits to refinancing, including lowering your interest rate, reducing your loan term, debt consolidation, accessing offset or redraw facilities, etc.
We know that the home loan process can be daunting. That’s where UFinancial comes into play. Our experienced brokers do your homework for you and keep up-to-date with all these options to help you find the right loan. Talk to a UFinancial broker today.