Mortgages Explained: Which home loan structure is best for you?
When choosing a home loan, it’s important to identify the key features that will work with your current financial situation and help achieve your long-term goals. The best way to compare loan types is to compare the key facts sheet from different lenders, which give information on the amount to be repaid over the life of the loan, structure, fees and charges in a set format that is easy to compare.
Alternatively, you could yourself the hassle and contact a Lendfin specialist to talk through the options. With our network of over 20 Australian lenders, we have access to almost all loans in the market plus the experience to help select the loan that’s best for you.
This is the standard, off-the-rack, home loan, with the rate set against the Reserve Bank’s official cash rate plus the bank’s added margin. The interest rate can go up or down according to economic conditions, meaning that monthly payments are subject to change. Whilst variable rate loans can be a gamble in terms of the interest rate, they are also the most flexible type of loan and can have added features such as the option to make extra repayments, a redraw facility or an offset account.
Fixed rate loans lock your interest rate for a period of 1 to 5 years, usually at a rate slightly higher than the lender’s current variable option. They are a good option for borrowers that follow a strict budget as the repayment amount is set for the fixed period. However, fixed rate home loans usually do not allow extra repayments and can be subject to break fees should you wish to change loan type or refinance during the fixed period.
This type of loan is popular for property investors, as it allows for property to be sold after renovation or appreciation of the property market, and the sale amount is used to pay back the principal. Previously, interest only loans were available to young home buyers, however following recent tightening of lending requirements it is very rare for an interest only loan to be approved for a first home purchase.
Interest only loans can be fixed or variable, and the interest only term is generally limited to 5 years. After that term, the borrower will be required to start paying down the principal amount.
Line of Credit/Overdraft
A line of credit (aka overdraft facility) is best for those who have paid down their home loan and are looking to cover large expenses from time to time, such as home renovations or other expenses. They generally have a higher interest rate than a principal & interest loan and are not usually offered for first-home buyers. A line of credit is really only suitable for those with good financial habits, as they do not require the borrower to repay the principal amount and basically act as a giant credit card secured by your home.
If you do not have the 20% savings required to borrow without Lenders’ Mortgage Insurance, there is the option to have a guarantor (usually parents or other family members) put up their home or assets as extra security against your mortgage. This means that if you default on your loan, the lender can call upon the guarantor’s security as well as your security in order to recover its loss.
Specifically designed for self-employed people, low-doc loans are a good option for people who are unable to provide the usual documentation required for a home loan such as 2 years of financial statements and tax returns.
If you would like to find out about the type of loan best for your circumstances, contact Lendfin for a personal discussion and pre-approval.