Compare the various home loan options and weigh their advantages and disadvantages.
The main types of
home loans
Comparing the various home loan options and evaluating their advantages and disadvantages can help you make an informed decision. Among the choices are variable rate loans (standard and basic), fixed rate loans, and Line of Credit (equity loan). Review the descriptions below to understand each type of home loan more thoroughly.
Interest only home loan
When obtaining a loan from a lender or bank, you have the option to make payments solely towards the interest or include payments towards both the interest and the principal amount borrowed. Opting for interest-only payments results in lower monthly repayments, allowing for more flexibility in managing expenses such as renovations. However, lenders always evaluate your capacity to repay both the interest and principal to approve the loan, considering that interest-only loans typically have a maximum duration of up to 5 years.
Fixed vs variable home loan
A fixed-rate loan enables borrowers to secure the current interest rate at the loan’s settlement, preventing any changes in the interest rate throughout the loan term. This option offers stability in repayments, typically for periods ranging up to 5 years within the loan’s total lifespan of 25 or 30 years. However, borrowers may miss out on potential savings if interest rates decrease during the loan period.
Bridging loan
A short-term financing solution designed to “bridge the gap” between the sale of one property and the purchase of another. It provides quick access to funds, typically secured against existing real estate, allowing borrowers to proceed with a new purchase before their current property is sold.
Construction loan
A construction loan is tailored to address the distinct requirements of financing ongoing payments during the construction phase. Unlike a standard home loan, which is typically disbursed as a single lump sum, a construction loan permits borrowers to draw down on the loan balance as needed throughout the construction process.
Variable (principal and interest) loans
The interest rate on your home loan can vary based on the decisions of the Reserve Bank of Australia. If the Reserve Bank adjusts the official interest rates, your lender may also adjust the interest rate on your loan accordingly, either increasing or decreasing it in response.
Split rate (principal and interest) loans
A split rate loan offers the flexibility to lock in a portion of the loan at a fixed interest rate while leaving the rest as variable. This allows borrowers to enjoy the stability of a fixed rate while still having the potential to benefit from any decrease in variable rates. You have the freedom to decide the allocation of funds between fixed and variable portions, providing the security of a fixed rate along with the opportunity for savings if rates decline.
Introductory loan
The initial interest rate, often referred to as the honeymoon rate, is intentionally set low to entice borrowers. This rate usually remains in effect for approximately 12 months before transitioning to a higher rate. It’s worth noting that these rates can either be fixed or capped, but they generally revert to standard rates once the honeymoon period concludes. Advantages: Offers some of the lowest rates available in the market. Payments made during the introductory period can significantly reduce the loan principal. Certain lenders may offer an offset account feature alongside these loans. Disadvantages: Payments are prone to increase once the introductory period ends.
Home loans on pensions – age & disability
While obtaining a home loan as a pensioner can present challenges due to perceived risk by lenders, securing a mortgage is still feasible. Pensioners or older individuals seeking a home loan may face limitations on borrowing amounts due to perceived higher risk. However, various types of home loans are accessible to pensioners, including reverse mortgages, line of credit home loans, and investment loans.
Alternative doc loan
An Alternative (Alt Doc or low-doc loan) is tailored for borrowers who struggle to provide the extensive paperwork typically required for a conventional home loan. Particularly favored by investors and self-employed individuals, this loan type relies on alternative documentation provided by borrowers to assess their eligibility for a loan.
Line of credit loan
After owning a property for some time and accruing equity through repayments, you can apply for a line of credit loan. This loan type offers flexibility, allowing you to access funds as needed. It’s a versatile financial tool, enabling you to utilise the money for various purposes and repay it according to your terms. While advantageous for those with positive cash flow, failing to regularly reduce the line of credit balance can be costly due to higher interest rates and potential equity reduction in your home.
Non-conforming loan
Individuals with a poor credit history might encounter challenges securing approval for a standard home loan due to their perceived higher risk to lenders. However, non-conforming loans offer an alternative avenue for such individuals to obtain financing. These loans enable lenders to consider alternative evidence of the borrower’s repayment capability. Typically, a larger deposit is required as assurance of the borrower’s ability to repay the loan, alongside a higher interest rate to compensate for the heightened risk perceived by the lender.
Self employed home loans
Securing a home loan while self-employed often entails navigating additional complexities in the application process. Essential documentation typically required includes: Proof of ABN registration for at least two years. Personal and business tax returns for the past two years, along with corresponding tax assessment notices. Balance sheets and profit and loss statements spanning the previous two years. Comprehensive details of any external liabilities, such as leases, hire purchase agreements, overdrafts, company loans, or guarantees. Business bank statements from the last month.
What do our customers think?
To determine your readiness for homeownership or investing in property, reach out to a JDL Finance broker today
