The home loan market is constantly changing with the release of new products almost every day and like the ancient Romans said, caveat emptor - let the buyer beware.
The challenge is to find the best loan with the features that best suit your particular circumstances, today and into the future.
You can trust Leading Broker to analyse, compare and contrast several hundred different home loan products from the leading lenders, and to help you understand which ones are best suited to achieve your goals.
Also Leading Broker’s Mortgage Calculators, are a proven guide that will help you see your borrowing capacity, repayments and interest charged.
Let's look at the different types of home loans available:
Variable Rate home loan
Variable Rate home loans are loans in which your minimum repayment may rise and fall in line with interest rate changes in the market place, such as the official interest rate set by the Reserve Bank of Australia.
Put simply, if interest rates set by the Reserve Bank fall, under a Variable Rate home loan your repayment may also be lowered.
Of course, this may give you the opportunity to continue with the higher, previous repayments so that you pay off your loan sooner. A Variable Rate home loan gives you flexibility to make changes to your repayments as your life and plans change - without costing you a penalty.
On the other hand if interest rates set by the Reserve Bank rise, your repayments may rise accordingly. It is important to remember therefore that financial institutions reserve the right to increase their interest rates beyond that set by the Reserve Bank.
There are two types of Variable Rate home loans:
Basic Variable Rate loan, which generally has fewer loan features and is less suitable if you are looking to pay off your mortgage more quickly.
Standard Variable Rate loan, which generally has more features and is more suitable if you’re looking to pay a set, regular repayment amount every month over the full term of your home loan.
Advantages of a Variable Rate home loan
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Flexibility and other features, such as low introductory or “honeymoon” rates, the ability to make additional payments and a redraw facility
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Repayments may fall when official interest rates fall
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Standard Variable Rate loans allow careful borrowers to pay off their home loan more quickly because there is no penalty for paying more than the minimum repayment
Disadvantages of a Variable Rate home loan
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Potentially a higher interest rate or additional ongoing fee's because of additional features
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Repayments may rise when official interest rates rise
Fixed Rate home loan
A Fixed Rate (Principal and Interest) home loan has a fixed interest rate and, as a result, repayments are also fixed.
This type of loan offers peace of mind and repayment predictability. It allows you to plan your budget with certainty knowing that despite what happens in the financial markets, your rate and your minimum home loan repayments will not change during your chosen fixed-rate period.
The time period varies for a Fixed Rate loan with a “lock in” rate of repayments, usually one to five years, even though the term length of your loan could be up to thirty years. When the fixed rate period has ended you can decide to either (a) fix rates again at new market rates or (b) switch over to a variable interest rate.
Advantages of a Fixed Rate home loan
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Repayment amounts do not rise if the official interest rate rises, giving peace of mind to borrowers wanting certainty about their outgoings
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Allows you to plan your budget with more confidence
Disadvantages of a Fixed Rate home loan
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Repayment amounts do not fall if the official interest rate falls
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Allows for only limited additional payments
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Early payout of loan may incur a penalty
Split Rate home loan
A Split Rate (Principal and Interest) loan is one that lets you choose how much of the loan is fixed, in order to take advantage of the security of a fixed rate and reduce the impact of any interest rate rises, and how much of the loan is variable so that you attract the more favorable variable interest rate.
By selecting how much of your loan you allocate to each, a Split Rate home loan may be a useful compromise if you’ve been agonizing over the decision between Fixed Rate and Variable Rate home loans.
Advantages of a Split Rate home loan
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Improved accuracy in budgeting than a full variable rate loan
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Allows you to make additional payments on the Variable Rate portion of your home loan, thereby paying off your loan sooner
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Reduces exposure to Reserve Bank rate rises
Disadvantages of a Split Rate home loan
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Allows only limited additional payments, since a portion of your loan will be set at a fixed rate
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Repayment amounts will rise with any Reserve Bank rate rises
Interest Only home loan
Interest Only loans are loans that only require you to pay the interest portion of the repayments during the term of the loan. This means you will be saving money compared to those people who are paying both the principal and the interest.
Interest Only loans are mainly suited to investors who will typically use this type of loan to purchase a property, make minimal repayments and trust that property values will go up (or they will renovate) so that, when they resell the property, they will make money.
At the end of the interest-only period - usually one to five years - you must begin making repayments on both the principal and interest for the remaining term of the loan.
Advantages of an Interest Only home loan
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Lower initial repayments, giving you more money to renovate or improve the property
Decreased entry cost in the residential investment market, giving you the advantage of making larger contributions to your primary place of residence
Disadvantages of an Interest Only home loan
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Payments will increase at the end of the interest-only period, as you will then be paying both the principle and the interest
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Borrowing capacity is evaluated by lenders on your ability to meet repayments, not on the Interest Only timeframe, but also the principle-plus-interest period.
Line of Credit home loan
This loan is designed to provide the borrower with easy access to equity built up in your property to a pre-agreed limit. These funds could be used for major purchases like investment properties, cars or renovations.
You only pay interest on the funds you’re actually using, not the total limit of your facility, so there’s no need to make regular repayments if you’re below your credit limit.
For a Line of Credit loan to work well, there needs to be more money coming into the account than what is going out on purchases with credit cards. If the balance on your Line of Credit is not reduced regularly, at a minimum you will have an interest-only payment each month, which can add up over the long term.
Advantages of a Line of Credit home loan
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Ready access to money and the ability to pay it back later
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Lower interest rates than those for credit cards or personal loans
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Flexibility
Disadvantages of a Line of Credit home loan
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Requirement for disciplined, regular principal payments
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Relatively expensive if not managed carefully
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Typically higher interest rates
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Potential to diminish built-up home equity
Low-Doc (and No-Doc) home loans
A Low-Document, or Low-Doc loan for short, are ideally suited to investors or self-employed borrowers who are unable to provide full financial statements and other evidence of their income.
There is a growing range of Low-Doc products on the market and many lenders will offer both standard and premium Low-Doc loans with either fixed or variable interest rates. Borrowers can also get access to a range of loan features and options never previously available.
However, most lenders require Low-Doc borrowers to take out lenders' mortgage insurance when borrowing up to 80% of the property value.Some lenders will also charge a higher interest rate for this type of home loan product, although that rate may be reduced after a certain time period or when you are able to provide the necessary financial and income information.
Advantages of Low-Doc home loan
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No tax returns are required
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Choice of principal-and-interest or interest-only home loan type
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Access to fixed or variable interest rates, line of credit, and redraw facilities
Disadvantage of Low-Doc home loan
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Normally a higher interest rate
Introductory home loan
Introductory home loans, sometimes called “honeymoon loans”, feature discounted interest rates that apply for a pre-determined period of time, usually six months to a year. So, in the beginning of your loan term your repayments will be low, and can be either fixed or capped.
However, once the introductory period ends, the repayment rate will likely revert to a higher rate - and usually one that is higher than even the standard home loan. Also, there are usually fewer extra features in this type of loan, and fees and charges usually apply for early repayments.
An Introductory home loan may suit first home buyers who want time to adjust to their repayments, or people who are refinancing and need a financial boost.
Advantages of an Introductory home loan
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Usually the lowest interest rate available
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Principal can be reduced more quickly during the introductory rate period
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Offset account is available with certain lenders
Disadvantage of an Introductory home loan
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Payments will usually increase when the introductory period is over
Non-Conforming home loan
These loans are designed to help people with poor credit ratings obtain a loan. Many lenders are now willing to overlook prior credit difficulties and offer Non-Conforming home loans.
A Non-Conforming loan works essentially like most other loans. Borrowers can choose from a range of loan types including Variable Rate, Fixed Rate and Split Rate loans, and features like line of credit, redraw and offset facilities.
Because credit-impaired and non-conforming borrowers are regarded as higher risk, most lenders will want evidence of your ability to repay the Non-Conforming loan. A larger deposit than that required for other, more traditional loans will generally be required, as well as a higher interest rate and/or a higher fee structure. Non-Conforming home loans can also be less flexible, particularly when it comes to refinancing.
Advantage of a Non-Conforming home loan
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Loans obtainable for people with a poor credit rating
Disadvantage of a Non-Conforming home loan
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Interest rates are higher compared to traditional loans
For more information, call Leading Broker today on 1300 123 388!