Types of Home Loans

There are so many home loan products available to all borrowers. Each home loan is a product in itself carrying various features and options to assist borrowers achieve the financial dreams and objectives.

 Basic Home Loans

A basic home loan is a home loan where some of the additional options are not available.
The interest rate on basic home loans is usually lower then the standard variable interest rate on fully optioned home loans.

Many borrowers find the basic features are all they really need and don’t need to pay a premium for all the extra bells and whistles of a Standard home loan. Working out the features you require from your home loan may save you thousands of dollars.

It is important to understand the limitations of a basic home loan and the flexibility you require before deciding which loan to go with.

 Standard Home Loan

A standard home loan is the most common of home loans. It is what most of us have when we buy a home and it usually means we have all the bells and whistles available within our loan.

The additional benefits of redraws, making extra repayments, having the loan split to incorporate combinations of variable rates, fixed rates, principal and interest loans, interest only loans and line of credit are generally available with the fully optioned home loan.

The standard home loan interest rate is usually the standard variable interest rate advertised by home loan providers.

 Principal and Interest Loan

A principal and interest home loan is a loan that is designed to be paid off over a 25, 30 or 40 year loan term.

The principal and interest (P&I) is the most common home loan which borrowers tend to want to pay off as quickly as possible to save on the amount of money paid in interest over time.

The monthly repayments are calculated over the term of the loan and incorporate the original loan amount and the interest component based on your interest rate.

Where possible you should always choose a principal and interest loan that will allow you to make extra repayments to help you pay off your loan more quickly.

If you make additional monthly, fortnightly or weekly repayments you will end up paying substantially less interest and pay off your loan faster.

Use the homeloanhints calculators to play around with your monthly repayments and how much extra you could pay. You might be surprised how quickly you can pay off your loan and how much you will save.

 Interest Only Loans

An interest only loan means that you are only paying the interest on your loan. It means that if you only meet the interest you will not be reducing the outstanding balance.
Interest only loans are quite common:

  • When the loan is taken out to buy an investment property  and borrowers only want to pay the minimum monthly interest. People often do this if they are already using their cash savings to pay off an owner occupied home loan more quickly.
  • For borrowers who want to limit their monthly loan repayments by paying just the interest. This provides flexibility but the outstanding loan balance stays the same. People paying interest only often aim to make additional repayments when they can to bring down the monthly interest repayment.
  • For borrowers who like the idea of limiting their monthly commitment until they get used to the discipline of a monthly home loan commitment.
  • When a borrower changes circumstances like starting a family or becoming reliant on one income, the interest only option takes the pressure off.
  • Interest only terms are generally for one to five years before the loan reverts to principal and interest so you can still pay off the loan within the term specified.

 Fixed Rate Home Loans

Fixed rates allow you to lock in an interest rate and your monthly repayment. The fixed payment and interest allows you to budget your monthly commitment and reduces your exposure to interest rate fluctuations

Otherwise you can combine a fixed rate loan with a variable rate loan in what is commonly known as a cocktail loan – part variable, part fixed.

There are however restrictions to fixed rate loans:

  • Firstly the interest rate is fixed for a term, usually between 1 and 10 years. So if interest rates fall your fixed rate will stay the same until the term expires.
  • If you want to get out of your fixed rate before the fixed term expires you will face a payout penalty. This could amount to a significant amount of money especially if interest rates drop dramatically.

It isn’t fun being faced with such a large payout penalty so it’s important to  understand the risks of locking in a fixed rate.

If the interest rate is fixed so is the monthly repayment. While some home loan providers allow you to make additional repayments there are limitations – it is very important to ask this question of your home loan provider.

 Constructions Loans

If you are building or renovating your own home you might consider a construction loan to achieve your goal.

Home Loan providers are nervous about construction loans and they require a lot more documentation and detail before they will lend you the money to start building.

For a construction loan to be approved you will generally be required to provide a fixed price building contract from a licensed builder.

While the terms and conditions may be onerous, remember that the home loan provider is protecting their own interest as well as yours by taking into consideration the unlimited setbacks and cost blow outs that can occur when building or renovating. 

They are attempting to protect the borrower against a blow out in construction costs and ensure the construction requirements such as council approval are all complied with upfront.

Construction loan hints:

  • Obtain a fixed price building contract from a licensed builder.
  • Complete all the basic requirements such as council approvals.
  • Ask the home loan provider to give you a written letter outlining how their construction loans operate, what is required to obtain extra funds and when do they release funds to the builder.
  • Work with your builder so that they know how your construction loan will work and what they are required to provide to ensure a smooth as possible experience in building your home. 

Lo Doc Loans

A lo doc or low documentation home loan usually involves less paperwork and is commonly used for someone who is a self employed borrower who has not completed tax returns or doesn’t have any financial statements available to confirm their income.

To successfully obtain a lo doc loan you are likely to require your business to be GST registered for a minimum of 6 months and have your ABN for a minimum of 2 years.

Self Employed Loans

If you are self employed you can obtain the same types of loans as any employee as long as you can provide tax returns to confirm your income. To obtain a standard variable home loan you will need to supply two years of company, business and personal tax returns.

Line of Credit Loans

A line of credit facility is a loan whereby you only pay for what you use. This means the minimum monthly repayment is the interest on the amount outstanding. If you don’t use the line of credit facility then no monthly repayment is required. In most cases a line of credit facility is set up as a separate loan account with an owner occupied loan or an investment loan.

Credit Impaired Loans

Credit Impaired loans are available if you have experienced difficulty in repaying your home loan or have a number of defaults registered against your name. If you find yourself in this position you can still obtain a loan however your interest rate may be higher than the standard rates available.