Like anything in life, home loans aren’t always black and white. There are many types of home loans that you may have never even heard of! When deciding which type of home loan is right for you, a quick Google search will bring up a tonne of results; variable rate loans, fixed rate loans, construction loans…the list goes on. But, in reality, there are complexities and varying features that come with every loan that a Google search simply won’t reveal.
At Inovayt, we have a dedicated team of experienced brokers who can assist you to determine which type of home loan is best for your needs.
We take a detailed look at some of the most common types of home loans below.
Variable rate loans
A variable rate home loan is where your interest rate will vary with market changes. This may mean your minimum repayments will also vary.
As external interest rates rise and fall, so too will your rate and repayments. This often makes it difficult to budget and plan for the future as the amount you are paying can change. This might seem a little nerve-wracking – especially for those who want to know exactly how much they’re going to pay each month – but there are many benefits to variable rate loans as well.
Real Estate Australia says: “Unlike other loan types, variable-rate loans allow homeowners to make additional repayments free of charge….many also offer access to an offset account and a redraw facility, which allows borrowers to access these additional repayments at a later stage.”
While variable rate loans typically have more flexibility, these features may add additional costs to your loan.
Fixed rate loans
A fixed rate loan is when your interest rate is essentially fixed for a set period. This means your minimum repayments will remain the same for a set period – commonly, five years.
While these loans tend to attract fewer fees due to reduced loan features, there’s also a risk that if interest rates drop, you won’t receive any of the benefits.
Partially fixed rate
If choosing an entirely fixed rate or variable rate home loan seems too overwhelming there is another option. You can consider doing both, a split between fixed and variable. For instance, you may choose to do a 50/50 split which means that for half of your loan, the interest rate is fixed and will not vary. However, the other half will vary in line with market conditions.
Principle and interest loans
A principal and interest loan is a traditional mortgage in that your repayments cover the principal amount you borrowed as well as the interest that’s accruing. This can be the most cost-effective option as you’re reducing your principal over the life of the loan which means your interest is regularly being calculated based on the amount that you owe at that time.
Construction loans are designed to help you build your dream home. They allow for your finance to be paid in stages as the build progresses compared to purchasing an established property where the bank lends you a lump sum.
Typically, you only pay interest on the amount that is drawn at each stage, as opposed to the whole loan amount.
For more information on construction loans, visit our blog, ‘How to Deconstruct a Construction Loan: What You Need to Know.’
Guarantor loans are a type of loan that require a guarantor to co-sign for finance. Typically, a guarantor is a parent or family member who agrees to repay the borrower’s debt should the borrower default.
While a guarantor loan can provide first home buyers with the ability to obtain finance, there are still some important considerations that all parties need to assess. This action reduces the future borrowing capacity for the guarantor while they are listed on the mortgage. If for some reason you find yourself in a position where you are unable to make payments, the responsibility for repaying the loan will fall to the guarantor which can cause a strain.
For more information on guarantor loans, visit our blog, ‘Using a Guarantor to Purchase a Home.’
Key things to keep in mind when reviewing loan types
- Mortgage features: As indicated above, the features of each loan will vary and typically, you will end up paying more for some features. It’s important to consider whether these features are non-negotiables or just a nice to have and what impact it has on your hip pocket.
- Seek professional advice from a broker: While there are various comparison sites you can look at to compare loans and their features, it’s not the same as having an experienced professional review these loans with your lifestyle and circumstances in mind. In addition to this, many comparison sites use affiliate and promoted links meaning they have a vested interest in where you click.
- Interest isn’t everything: While understandably, we all want a low interest rate, we find that people often become fixed on the concept of interest rate without stepping back to look at the bigger picture. Other loan features may be equally important, such as an offset and redraw facility, lender reputation and loan flexibility. While we’re not advising you disregard the interest rate, we are suggesting you also consider all the features of your loan.
- Know what you can comfortably and reasonably afford to borrow: Don’t get too caught up in the different types of home loans that are available. Some might say that how much you borrow is far more important than how you borrow it.
Now that we’ve explored some of the more common types of home loans available, you may be trying to determine which loan type will best suit you. These are big life decisions so don’t guess! In every life situation, there are nuances and complexities involved which may influence which option is best for you. Come and speak with one of our finance brokers for a no-obligation chat now.