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Home loan products: what you need to know

A mortgage broker is to choosing the right home loan, what a sommelier is to choosing the right wine. Like wine labels across Australia, there are hundreds of home loan products and variations to choose from, with new products hitting the market regularly.

If you’re not a sommelier, choosing a wine can be hit and miss, but of course the longer term implications are far less serious than choosing the right home loan.

Seek the advice of an expert ― a mortgage broker ― in helping you make one of the biggest decisions of your life.

Six home loan products to get to know

Understanding the pros and cons of the most common mortgage products will have you prepared for a good conversation with your home loan broker.

While mortgage product features vary, you can expect to find six common home loan options:

  • Basic
  • Fixed rate
  • Standard variable rate
  • Split rate
  • Interest only
  • Low doc.

Here are the basics of what you need to know about these mortgage options.

Basic home loans: pros and cons

These are the cleanskins of home loans – no fancy labels. Basic home loans are a popular entry point for first home buyers.

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  • Repayments are both principal and interest
  • Your interest rate is lower than the standard variable rate – usually by up to one per cent
  • Minimal ongoing fees usually apply.

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  • Features can be limited
  • Flexibility can be limited. For example additional charges may apply for switching or paying off the loan early, and extra repayments may not be an option.

Fixed rate home loans: pros and cons

Like buying a few dozen of a favourite wine label in anticipation of it becoming a collector’s drop and less likely to fit in to your future budget, a fixed interest rate home loan can provide you with some relief against rising interest rates.

Fixed interest rate home loans protect you against rising interest rates for a set term, commonly one to five years. This product is popular, and a sensible option when interest rates are predicted to rise, or if the economy is shaky.

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  • Certainty of regular repayments for a set time
  • If interest rates rise during the set term, your repayments stay as is.

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  • If interest rates drop, your repayments won’t
  • High break cost or economic costs (fees) may be required to break your fixed term, or switch products
  • Flexibility to make extra repayments during the term of the fixed rate may not be available.

Standard variable rate home loans: pros and cons

A standard variable rate home loan is akin to a favoured wine label, where connoisseurs are prepared to wear fluctuations in price acknowledging the conditions sometimes faced by growers and producers.

A standard variable rate interest and principal home loan allows you to borrow money for a set period of time, during which you make regular repayments on the interest and the principal. The interest rate fluctuates as economic conditions rise and fall.

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  • Repayments are aligned with current interest rates
  • If the official cash rate drops, and the market cycle is favourable to your lender dropping their home loan interest rate, you’ll benefit.
  • Standard variable interest rate home loans tend to offer more flexibility, like the ability to make changes ― such as extra repayments
  • Additional features like redraw facilities and offset accounts may be available.

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  • If the official cash rate rises, and the market cycle determines your lender will increase their home loan interest rate, your regular minimum repayments will rise too.

Split rate home loans: pros and cons

Like making a decision to buy a dozen favourite wines while the price point is low, and buy more at a later date taking advantage of price fluctuations, a split rate home loan is a popular, balanced option.

Split loans let you fix a portion of your interest rate for certainty around repayments for a set term, while taking out a portion on a variable interest rate.

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  • Certainty around a portion of regular repayments despite interest rate rises
  • Benefit from falling interest rates on the variable portion.

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  • If interest rates drop you’ll be left paying a higher rate for your fixed rate portion
  • If you break the fixed rate period early, break costs may apply
  • You may be limited around contributing extra repayments on the loan.

Interest only home loans: pros and cons

Interest only loans are the cellar door wine tasting experience ― you haven’t bought the bottle but you have tasted the drop, and benefited from the ambiance of the cellar door experience.

An interest only loan offers an opportunity to minimise repayment options by only paying the interest component on what you have borrowed. When capital appreciation on an investment property is a likely gain, paying down the principal doesn’t need to be a priority. For this reason, an interest only loan is attractive to property investors.

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  • Freeing up cash flow, while potentially gaining capital appreciation
  • Many traditional loan features are maintained.

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  • You are not reducing the principal you have borrowed
  • If you need to sell the property and capital depreciation has taken the market value below the principal you owe, you’ll bear a financial loss. Good property investment advice before buying should negate this risk.

Low doc home loans: pros and cons

No, this is not about drinking champagne on a beer budget. It is more about being an appreciator of ale, who is now keen to expand their repertoire to wine.

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.

A low doc home loan is a finance product structured to help people without proof of a regular, salaried income, enter the property or home buyer’s market.

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  • If you’re self-employed, a contractor or seasonal worker without regular proof of income, you may be able to enter the property market.

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  • For financial lenders to accommodate a higher risk profile borrower, higher interest rates are likely to apply
  • For the reason above, Lenders Mortgage Insurance (LMI) may also have to be paid.
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