With so many options available, it can be difficult knowing which product is right for you. Here is a comprehensive list of the most common loan types.
Basic home loans
Basic home loans or ‘no frills’ loans offer borrowers a loan with a low interest rate. This interest and principal repayment loan is a popular choice among home buyers. A basic home loan’s interest rate can be half to one per cent below the standard variable rate, which is sometimes combined with minimal ongoing fees. Potential drawbacks can include limited features, less flexibility, and additional charges if you decide to switch loans or pay the loan off sooner.
Fixed-rate home loans
Worried about rising interest rates? A fixed-rate home loan will allow you to fix your interest rate for a specific period, usually from one to five years. It can be a sound option when interest rates are on the rise, or in times of economic uncertainty. Should interest rates plummet, however, you’ll still have to pay off your mortgage at the fixed-rate until the end of the agreed fixed-rate period. Additionally, keep in mind that you may be charged a fee commonly called a break cost or economic cost, should you decide to break your fixed term or switch to another product. You may also be limited in making extra repayments.
Standard variable-rate home loans
A popular mainstream choice, standard variable-rate interest and principal home loans allow you to borrow money for a set period of time, during which you make regular repayments. This type of loan often provides the ability to make unlimited additional repayments and can usually provide extra feautures. The interest rate can vary depending on fluctuations in the official cash rate, so it is likely to go up or down depending on the market cycle.
Split-rate home loans
Want the best of both worlds? A split-rate home loan offers a balanced approach with both flexibility and security. A good product for both first time and existing borrowers, split loans allow you to customise your loan’s interest rate as you see fit: fixing a portion of your interest rate to give certainty to your monthly repayments during the fixed-rate term should rates increase, but also flexibility through taking out a variable-rate portion, often allowing the ability to redraw or offset funds.
Interest-only home loans
Interest-only loans offer borrowers lower repayment options, while maintaining many of a traditional loan’s features. This type of loan allows you to pay only the interest component on a mortgage; it does not reduce the principal component. They are a popular choice for investors seeking good capital appreciation on their investments.
Line of Credit
Allows access to funds by securing a line of credit against a property. Funds can be drawn at any time, for any purpose, up to an agreed maximum amount, while interest is only charged on the part of the line of credit that is used. Lines of credit are considered useful for when not fully drawn, as provides easy access to equity without the hassle of reapplying. Note that this type of facility requires discipline, similar to interest only there is usually no required principal repayment.
Low-doc home loans
If you’re self-employed, a contractor or a seasonal worker and do not have a regular income, a low-doc loan may be a solution. Although this typically comes at a cost, with higher interest rates and setup costs (may also have to pay LMI).
Loan Features
Other loan features available and useful to the investor can include; redraw facilities, offset accounts and split loans. Available features will vary depending on which loan product you have choosen. However when used correctly these features can provide significant interest savings and help to shave years of your loan!.
- Redraw facilities can be used to put savings directly into the loan to reduce interest payable. Funds can be redrawn at at any time, keeping in mind there may be a minimum redraw amount and fee. Fixed loans will also have restrictions.
- Offset accounts are useful for parking excess savings in order to reduce the interest paid on the loan, while also minimising tax paid on interest earnings. For maximum benefit ensure your account has a 100% offset.
- Split loans provide a balanced approach, allowing investors to take advantage of low interest rates with a fixed component, whilst still providing a variable component to enable the flexibility to redraw or offset.
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