Before you can choose a home loan, it’s important to understand the features and benefits of all the different types of loans.
Choosing a home loan can be a difficult and confusing task. Not only are there hundreds of loans from a huge array of lenders, but there are also several different types of home loans – each of which offers its own unique benefits.
Let’s compare different types of home loans to find out what they offer and whether they’re right for you.
Variable rate home loans
Variable rate home loans are the most popular types of home loans in Australia. With this type of loan, the interest rate fluctuates up and down in line with market interest rates, which means your repayment amounts will vary throughout the life of the loan.
A standard variable home loan allows you to take advantage of any interest rate falls, but it also means your repayments will increase if interest rates rise.
Fixed rate home loans
A fixed rate home loan allows you to lock in an interest rate for a fixed period, usually of between one and five years. During this period, the interest rate on your loan remains the same, regardless of any changes to the Reserve Bank’s official cash rate.
A fixed rate loan offers the security of consistent repayment amounts and protects you against any interest rate rises. On the flipside, you could miss out on an interest rate drop and end up paying more for your mortgage.
A construction loan is designed to provide financing for borrowers who want to build a home. Rather than providing access to a lump sum amount, a construction loan allows you to withdraw the money you are borrowing in stages – each withdrawal is called a progress draw. This allows you to pay your builder, tradespeople and other suppliers throughout the construction process.
Construction loans are available with variable or fixed interest rates and you only pay interest on the funds you have used. Once construction of your home is completed, you start making principal and interest repayments.
Low-doc home loans
Low-doc home loans are designed for self-employed borrowers who are unable to provide normal proof of income during the home loan application. While regular employees can provide payslips and employment details to prove they have a regular source of income, self-employed people tend to have fluctuating incomes and cannot provide the same documentary evidence.
Low-doc loans have different lending criteria to ordinary home loans and are available with fixed or variable interest rates. However, they usually offer higher interest rates than standard home loans and also attract lower loan to value ratios (LVRs).
Package home loans
A package loan combines a fixed or variable rate home loan with a range of other financial products. These other products usually include a transaction account and a credit card, but they can also include other extras such as insurance discounts.
The main benefits of package loans are the convenience of managing all your finances with the one bank, and the ability to save on fees across the suite of products. However, annual package fees usually apply.
Home loan features
You’re bound to come across a wide range of unique terminology and finance jargon when researching home loans, so it’s important that you’re aware of exactly what is offered by these common home loan features. Some loan features you may come across include:
- Additional repayments. The flexibility to make additional repayments allows you to pay down the principal amount quicker and therefore pay less interest.
- A redraw facility. This lets you access any extra repayments you make towards your loan if you ever need the cash.
- An offset account. A mortgage offset account is a transaction account that is linked to your home loan. The balance of the transaction account is offset against the remaining balance of your home loan, allowing you to pay less interest.
- Portability. This feature allows you to take the loan along with you if you move house, meaning you can avoid costly break fees.
- A line of credit. A line of credit allows you to access the equity in your home to spend however you like, for example to renovate the home or to invest the funds.
- Loan split option. This allows you to split your loan into separate portions, one with a fixed interest rate and the other with a variable rate, to enjoy the benefits of each type of interest rate.
Once you understand the features and benefits of all the different types of home loans, you’re well on the way to choosing a home loan that matches all your borrowing requirements.
Compare different home loan types below