Understanding the different types of mortgage loans available to you is just as important as finding your dream home. Home loans get you closer to owning your keys sooner and faster, but there is a sea of choices available to you in the market. So, picking the right loan can be quite tricky.
Here, we guide you through the top 13 types of mortgages you can choose from to match your unique situation.
1. Fixed rate loans
A fixed rate loan locks your interest rate for an agreed timeframe, which is typically 1-5 years. Usually, this type of home loan comes with a higher interest rate compared to a variable rate, but it offers security as you are protected from unpredictable rate hikes.
Fixed rate mortgages are perfect for borrowers who value certainty and don’t want to bet on cash rate predictions. Since this loan lets you know your interest rate and repayments for the agreed period, you can better plan your budget, stay ahead of your repayments and avoid worrying about whether or not you can pay off your loan.
Of course, fixed rates also have their cons. Since you lock your rate, you won’t be able to take advantage of lower repayments in case the interest rate goes down. Also, you may have limited access to loan features (including offset accounts and redraw facilities), and you may need to pay extra fees if you break your fixed rate before it expires.
2. Variable rate loans
With a variable rate home loan, your interest rate can go up or down depending on how the lending market changes over the life of your loan. This type of mortgage loan relies on the RBA’s official cash rate and the lender’s discretion, so your repayments move unpredictably.
Variable loans are best for borrowers who want flexibility. This loan allows you to access loan features, including offset accounts and redraw facilities that help you save more on the interest you pay over the life of the loan. Also, lenders won’t usually charge you for making extra repayments and refinancing.
Despite the flexibility, a variable loan yields uncertainty because your repayments increase or decrease based on the RBA’s changing cash rate. This can make your budgeting a lot harder if the rates change aggressively.
3. Split loans
If you’re unsure whether a fixed or a variable rate is better for you, you can split your loan. A split rate allows you to fix a portion of your loan and set the rest of your loan to a variable rate.
With this type, you are free to split your loan however you like. For example, if your loan amount is $800,000, you can fix the rate on $400,000 and keep $400,000 as a variable rate.
A split rate is perfect for homebuyers who want both certainty and flexibility. This way, you can enjoy the peace of mind from fixed repayments but still get the chance to access loan features and make extra repayments for the variable portion of your loan.
4. Owner-occupied home loans
An owner-occupied loan is a loan you can get when you’re looking into purchasing a property to live in. Because you occupy the home yourself, you cannot rent it out as an investment.
When you’re planning to get a home loan, make sure you specify if you intend to get an owner-occupied loan because it will affect your rates and repayments. Lenders view this type of mortgage loan as safer compared to investment loans, so it comes with lower interest rates.
If you intend to buy a home to live in, you may consider applying for an owner-occupied loan.
5. Investment home loans
Investment loans allow you to borrow money to purchase an investment property. As mentioned, this type of mortgage loan tends to have a higher interest rate compared to owner-occupied loans, so you need to meet stricter lending criteria.
This type of loan is for first-time or professional investors. With an investment loan, you can claim tax benefits through negative gearing.
Negative gearing is when the money you generate from your investment is less than the cost of your investment. Then, you can claim this net loss against your total taxable income to reduce the tax you pay.
6. Construction loans
A construction loan is fit for people planning to build a home or make major renovations. You can use the loan for both the land and construction or just the construction.
With this type of mortgage loan, a lender makes progressive drawdowns throughout the stages of the construction rather than paying a lump sum. The stages differ per lender, but they typically involve building the foundation, framing, locking up, fixing and completion.
In a construction loan, repayments are commonly interest-only on the amount drawn down. To give you a picture of how this works, if you’ve drawn down $120,000 from a $500,000 loan, you only need to pay the interest on $120,000. Then, you will pay the principal when the house is complete.
This kind of loan is suitable for borrowers looking into buying vacant land to build a home or an investment property, building a home on land they already own or making substantial renovations. Also, owner-builders who plan to construct the property themselves can benefit from a construction loan.
7. Guarantor loans
If your parents own a property and are willing to help you buy a home, this can be the type of mortgage loan you’re looking for. A guarantor is a direct or immediate family member (usually parents) who allows you to put up a portion of their property as security for your home loan.
A guarantor loan allows you to borrow more than 80% of a property’s purchase price without paying lenders’ mortgage insurance. With this mortgage, your guarantor is responsible for your loan in case you default on your repayments. So, it’s crucial to have a proper discussion with your guarantor to minimise the risks.
To find out more about using a guarantor, you can watch what Joseph Daoud, It’s Simple Finance’s managing director, reveals about this loan:
8. Bridging loans
A bridging loan is a short-term loan (usually an interest-only loan) designed to help you cover the cost of buying a new property while you sell your existing home. In a way, it bridges the gap between buying and selling.
If you want to buy a new property but haven’t sold the one you currently have, a bridging loan is for you. This offers convenience and can help you avoid renting as you transition from one home to another.
While this situation is appealing, this is an additional loan you take on top of your current loan, so you should be wary of the costs and interest rates you may acquire.
9. Low-doc home loans
Normally, loans require proof of employment and income, so some individuals find it harder to apply for a loan. With a low documentation loan, you can apply for a loan even if you don’t have the usual required documents (proof of employment, pay slips, etc.) for a standard loan.
This type of mortgage loan varies per lender and is best suited for potential homebuyers who are self-employed or freelancers. Through this, you can purchase or refinance a property despite your unique circumstance.
10. Refinancing home loans
Refinancing is not a loan product, but it involves replacing your existing mortgage with a new loan either with your current lender or with a new one.
While this loan type is not for everyone, refinancing your home loan can help you get a lower interest rate, access better loan features, tap into your equity or consolidate your debts.
11. Line of credit loans
A line of credit loan allows you to borrow against your existing equity. To put it simply, equity refers to the difference between your home’s current market value and your outstanding balance. In other words, the value of the property you already own.
For example, if the property is worth $800,000, and your balance is $450,000, your raw home equity is $350,000. Note that you can only borrow against your usable equity.
Usable equity is calculated as 80% of your home’s current value minus your outstanding debt. Given the example above, your usable equity is $190,000.
If you own a property and have enough equity in it, a line of credit loan can be for you. You can use your equity to buy another property, renovate or repair homes, buy a car or even fund your holiday or special events.
12. Reverse mortgage
A reverse mortgage allows homeowners (typically aged 60 and above) to draw on a portion of their usable equity and convert it to cash. Depending on the lender and age, they can receive the loan as a lump sum, income stream, line of credit or a combination of these options.
If you are 60 or over, own your home and are looking into funding your retirement without selling your property, a reverse mortgage can be one of your options. Unlike a traditional loan, you don’t have to make repayments until you sell the house, change situations or choose to pay voluntarily.
Even if this type of mortgage loan allows you to retain ownership, note that the interest compounds as time goes on and gets added to your principal loan.
13. Non-conforming loans
Lenders usually require good credit standing before approving a loan. Luckily, non-conforming loans are available to people who don’t fit big banks’ or major lenders’ common criteria.
This type of mortgage is designed for borrowers with special situations, including those who have poor or no credit history, are unemployed or retired. While this loan gives you an opportunity despite your financial situation, a non-conforming loan tends to have higher interest rates because of its riskier nature.
How to choose your home loan?
After understanding the different mortgage loans, there are many things you should consider. The Australian lending market is highly competitive, so it’s important to compare various lenders, loan packages, loan terms, features and fees to find a competitive product that will benefit you the most.
Aside from comparing loans, you should also assess your plans, situation, and needs before making your decision. This allows you to secure a loan that fits your circumstance and can help you maximise your borrowing power.
To make all of this easier and faster, It’s Simple Finance’s mortgage brokers are always happy and ready to help you get a loan with comfort and confidence. Book your FREE consultation now to access the top 40+ banks and lenders in Australia that match your lifestyle and goals.
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