Purchasing a home can be one of the biggest financial decisions a person makes. Understanding and getting to know what home loan products are available to you will help you start a conversation with your Mortgage Broker and allow you to decide what product is right for you.
Basic Home Loan
Are the popular entry point for first home buyers, they have no fancy labels and repayments are both principal and interest.
Repayments both principal and interest.
Interest rates are lower than the standard variable rate.
Minimal ongoing fees.
Loan features can be limited.
Flexibility can be limited e.g. extra payments may not be allowed.
Fixed Rate Home Loan
Protects you against rising interest rates for a fixed term period commonly 1 to 5 years. These loans are a popular and sensible option when interest rates are predicted to rise, or the economy is questionable.
Certainty of regular repayments for the duration of the fixed term period.
Interest rate rises will not affect your repayments for the duration of the fixed term period.
If the interest rate drops, your repayments won't as they are locked in for the set fixed term period.
Higher break costs may be required if you break the fixed term agreement.
Flexibility to make extra payments during the term of the fixed term may not be available.
Standard Variable Rate Home Loan
This loan product requires you to pay the principal and interest for a set period on the interest rate aligned with the current interest rates fluctuations.
Repayments aligned with current interest rates.
You will benefit if the cash rate drops and lender drops their home loan rate.
More flexibility e.g. extra payments.
Additional loan features e.g. redraw and offset accounts.
Regular minimum repayments will increase if the official cash rate rises.
Split Rate Home Loan
This product allows you to fix a portion of your interest rate for a set term, while taking out a portion on a variable interest rate.
Fixed Term: provides certainty around regular repayments for the fixed portion.
Flexibility can be limited e.g. extra payments may not be allowed.
Fixed Term: High break costs may be required if you break your fixed term agreement.
Variable Interest: Regular minimum repayments will increase if the official cash rate rises.
Interest Only Home Loan
This product provides the borrower the opportunity to minimise repayment by only paying the interest component on what you have borrowed. For this reason interest only loans are attractive to property investors who's primary purpose is capital appreciation on the property.
Allows the borrower to free up cash flow, while potentially gaining capital.
Many traditional loan features available.
Does not reduce the principal amount that has been borrowed.
Capital depreciation may occur when you have to sell the property, this then requires the borrower to bear the financial loss.
Loc Doc. Home Loan
This loan product is to help individuals who do not have regular income, and without proof of regular income enter the property market.
May be suitable for self-employed, contractors and seasonal workers.
Generally, has a higher interest rate to accommodate the higher risk profile of the borrower.
Some lenders may require the borrow to pay Lenders Mortgage Insurance (LMI).
If is recommended that good property investment advice is sought to help negate any risks associated with purchasing investment property.