There are many different types of loans available in Australia and each type has different features that appeal to different borrowers. At My Property & Finance, we’ll help you understand the main types of loans available and how they differ, so that you can be confident that the loan we recommend is right for your circumstances.
Variable rate loan
Variable rate loans are some of the most popular and competitive types of home loan in Australia. With variable rate loans, the interest rate varies in line with many factors such as movements in market interest rates, which means they can change at any time.
The upsides of variable rates are that they tend to be lower than fixed rates and may have fewer fees. They also offer greater flexibility such as the ability to make extra repayments to pay your loan off faster. In addition, they generally come with more features than fixed rate loans, like 100% offset account facilities that will help reduce the amount of interest you pay. With variable rate loans you can also switch providers without incurring a break cost fee which is often charged with fixed rate loans.
The downsides of variable rate loans are that if interest rates rise, the amount of your repayments will too.
Fixed rate loan
With this type of loan, the rate and the repayments are fixed for a set period, which is usually between one and five years. If you want the certainty of knowing what your loan repayments will be for the foreseeable future, then a fixed rate loan might be right for you.
The downside of a fixed rate loan is that you may wind up paying a higher rate should there be a significant drop in variable interest rates after you’ve fixed. You may also be penalised financially if you exit/pay out the loan before the end of the fixed rate period.
Once your fixed period ends, your loan will automatically convert to a variable rate loan.
Split Rate Loan or Combination Loan
A split rate loan combines the features of a variable and a fixed rate loan, giving you the best of both worlds – providing you with some protection from rising rates yet still allowing you to benefit from any rate cuts. As a borrower, you can choose to set a percentage of your loan at a variable interest rate, let’s say 75%, with the remaining portion (25%) set at a fixed rate for a period of time.
A ‘basic’ home loan is also referred to as a “no frills” loan. This is a variable rate loan that comes with a lower rate than a ‘standard’ home loan because it has fewer bells and whistles. There are distinct advantages and disadvantages with this type of loan. The interest rate may be consistently lower however, as the loan is variable, you’ll still be vulnerable to interest rate changes, just like any other borrower. Facilities and features, such as a loan redraw may not be available with a basic home loan. The definition of ‘basic’ varies between lenders so it’s important establish exactly which features facilities are available. Keep in mind that there are some features which can help you pay off your home loan sooner, which saves you money over time. The cheapest loan isn’t always the one that’s best for you.
An offset loan involves a savings or transaction account that is linked to your home or investment loan and it may be linked to either a variable rate loan or a fixed rate loan (in some cases). The way it works is that the balance of the account is taken away from the principal remaining on the loan for the purposes of calculating the interest on your repayments.
For instance, if you have $30,000 in your offset account and your mortgage is $350,000, you will only pay interest on the loan value of $320,000. In most cases, this doesn’t reduce the amount of your scheduled repayments, however it can cut down your interest and shave years off your loan by reducing the overall repayment amount.
Line of Credit
There may be times in your life where you require a large sum of cash relatively quickly. In this instance, if you have a reasonable level of equity in your home you could consider a line of credit loan. This type of loan allows you to draw down funds at any time, whether that’s to cover medical expenses, to buy shares, pay for renovations, or to take a holiday. It’s like having a credit card with a large limit, but your home will act as security for the loan. With a Line of Credit Loan, you only pay interest on the funds you use, but you need to be disciplined enough to ensure you pay off the principal as well as the interest.
Property investment loan
An investment loan is a type of loan that someone secures to buy an investment property. When you apply for a loan, you’ll need to specify whether you’re applying as an owner-occupier loan or an investor loan. This distinction is likely to change the rate at which you’ll be charged interest, as well other factors such as whether you decide on an offset mortgage, variable rates, fixed home loan or a construction loan.
Investment loans typically have stricter lending criteria, with lenders often reducing loan-to-valuation ratios (LVR’s), meaning investors may need to raise a larger deposit before applying for a loan. In addition, they usually have a slightly higher interest rate than standard residential home loans do.
Low Deposit Loan or Mortgage Insured Loan
Low deposit loans are also referred to as ‘high loan to value ratio loans’ or ‘mortgage insured loans’. These types of loans are offered by some lenders to people who who don’t have enough cash for a full 20% deposit plus costs.
While some lenders can provide a loan up to 95% of the property’s value, they’re considered a high risk and potential borrowers will , as a consequence, incur a lenders mortgage insurance fee.
Interest Only Loan
With an interest-only loan, your repayments are only required to cover the interest on the amount you’ve borrowed. During the interest-only period there is no reduction in the principal of the loan. This type of loan will have lower repayments in the short term but will be more expensive over the life of the loan itself.
Many lenders will allow a parent or an immediate family member to use equity from their property to guarantee part of your loan. This is called a guarantor loan. The person providing this assistance is known as a guarantor, which is different to being a co-applicant or co-signer.
To use a guarantor, you must be able to service the entire loan on your income as the guarantee does not reduce or assist with home loan repayments.
The guarantor is not required to give any cash to the borrower for their deposit and the guarantee is limited, allowing the guarantor to choose the amount to commit as security. It’s important for a guarantor to understand that there’s a commitment to pay back the amount of the guarantee in case the borrower defaults.
The guarantor can request to be released without the loan being repaid in full, so long as enough equity in the property has been achieved.
Home Loan Portability
Loan portability is a feature offered by some lenders that allows you transfer your existing loan to your new property without having to go through the hassle of refinancing and applying for a whole new loan. Some of the benefits of porting your home loan can be that the process is generally quicker than applying for a new loan and it can allow you to avoid some of the potential upfront costs involved with applying for a new loan. It also means you can keep the features and facilities you already have set up with your loan, such as offset accounts or online banking.
It’s important to be aware though that there are some disadvantages to this feature. One disadvantage is that you will be staying with the same lender and more importantly, the same interest rate. This means that even if there’s a more competitive and suitable home loan product offered by the same lender, you won’t be able to take advantage of it unless you refinance.