Types of home loans: a guide
Posted on 1 Sep 2017
Winning the lotto or inheriting a fortune aside, most of us will need to borrow money to make homeownership a reality.
There are hundreds of different loans available from hundreds of lenders but they are all based on two things:
1. Principal – the amount of money you borrow
2. Interest – how much you pay to borrow the money (calculated on the outstanding principal)
With these fundamentals in mind there are only three main types of home loan:
1. Variable rate loans
You pay a different or ‘variable’ interest rate every month, which is set based on movements in the official cash rate (determined by the Reserve Bank of Australia) and other market conditions. Your starting rate is generally lower than in other (fixed) loans as your repayments can move up and down as interest rates vary. One possible advantage of these loans is being able to pay off your loan sooner by making extra payments (typically there is no extra charge for this). But you also need to make sure your finances can cope with higher rates if they go up quickly.
2. Fixed loans
You agree a set interest rate for a set period, usually between one and five years, so you know how much you will need to repay from month to month and you’re protected from increases in market interest rates. On the flipside, you don’t benefit from any reductions in interest rates. Some fixed rate loans allow extra payments up to a set amount and some also offer redraw so you can withdraw money already repaid on the loan up to a specified amount.
3. Split loans
This is where you fix one part of your home loan, while the rest is subject to the variable rate. This can allow you to have interest rate security with repayment flexibility. Most lenders will let you set the fixed/variable portions in the way that suits you.
Once you choose the type of loan that suits your circumstances, you can examine the loan categories in more detail. This is where your choices expand!
The above is general information only. Please seek professional financial advice to assist with your personal circumstances.