The home loan market may be a confusing one to traverse – what with all the financial jargon flying around. Even experienced home buyers may feel daunted when faced with the number of mortgage loans available in the market. Fixed or variable? Professional package? Low-doc? Or a line of credit? Here’s a little article on everything you need to know about different types of home loan available in the market.
What is a home loan?
A home loan simply refers to a loan borrowed from a bank or financial institution to fund the purchase of a home. As security for the loan, a mortgage is secured over the house in favour of the lender and the property can be foreclosed if the borrower fails to repay the home loan in a certain time frame at previously agreed interest rates.
Different home loan options available to borrowers:
1. Fixed, Variable and Split – Starting with the most common choice that all borrowers are faced with – fixed or variable and split home loan. These rates refer to the kind of interest rate you choose to pay on your home loan. While fixed home loan means the interest rate that remains same either for the entire term of the loan or for part of the term. Variable home loans means the interest rate that fluctuates according to the market index, as set by the Reserve Bank. Many people nowadays are taking the middle path to maximise their benefit – partially fixing their loan and paying a variable rate on the remaining. Use our split home loan calculator to check your benefit. We will help you in making the decision whether you should fix your loan or not.
2. Interest only home loans – Your home loan consists of two parts; the principal or the actual amount you borrow and the interest that you pay on it. Your monthly repayments (calculate with our home loan calculator) are applied mainly towards the interest and some part pays off the principal, progressively reducing the size of the debt. However, for better cash flow management, especially for investors, it is possible to subscribe for interest-only loans as well. This means, for a fixed period of time, you only pay the interest making the repayments more manageable.
3. Low doc loans – Having your house financed requires usual documentation, which must be arranging with time. However, it may be difficult for self-employed individuals and contractors to provide regular salary slips and other such proofs of income. Low doc loans are specially meant for self-employed individuals and require minimum documentation for home loan. The home loan rate of interest is slightly higher, but it ensures mortgage access for self-employed and contractual workers.
4. Bad Credit Home Loans – These home loans are provided by specialist lenders to borrowers grappling with bad credit. Bad credit home loans come at higher interest rate but can be best utilized to overcome financial difficulties and bring your finances back on track. By gradually cleaning your credit file and demonstrating good financial behaviour, refinancing your home loan with traditional lenders at better rates is also possible.
5. Construction Loans – A construction loan can be availed to build your house from scratch or to fund major renovations. The product is designed to fund progressive stages of construction through progressive withdrawals and interest is only charged on the amount withdrawn leading to lower repayments.
6. Line of Credit (LoC) Loans – A line of credit loan can help you set a regular stream of income that you can use to fund renovations or meet emergency expenditure. By using the equity in your home, you can take pre-approval for a line of credit loan and only withdraw as much you need as and when required. The interest is payable only on the amount withdrawn.
7. Bridging Loans – Mostly, home owners sell a property to fund the purchase for a new one. However, with mortgage payments on your head, it may be tricky to pay for the new property while you wait for the proceeds from the sale of your existing property. A bridging loan helps you tide over this gap by providing finance in the interim. The lender takes security over both the properties until sale is completed for one when you can revert to your traditional home loan.
8. SMSF Loans – Self Managed Superannuation Funds not only give you greater control over your super but can also be used to fund your property portfolio. Established SMSFs can borrow under Limited Recourse Borrowing Arrangements where the property is held by a special purpose trust during the life of the loan.
9. Professional Home Loan Packages – High income professionals such as doctors and lawyers are considered low risk by lenders and often offered discounted professional packages on home loans. If you are a professional, it is worth asking your lender for a professional package or asking your mortgage broker for information.
10. Low Deposit Home Loans – As property prices increase, the deposit you have will be sufficient for securing a home loan keeps many people from realising their dream of owning a house. However, it is now possible to buy a home without having the full deposit if your parents guarantee your loan or by paying Lenders Mortgage Insurance (LMI).
11. Reverse Mortgage – Reverse mortgages are becoming popular with seniors to fund their golden years using the equity in their homes. The main benefit of a reverse mortgage is that the title stays with the borrower and the loan is payable only when the borrower decides to leave the property or dies. Under the negative equity clause, the loan amount can never exceed the market value of the property at the time of maturity of the loan.
At HashChing, we understand your home is your biggest investment. Get competitive interest rate home loans on HashChing through online mortgage comparison of broker pre-negotiated lowest home loan rates.
By Vidhu Bajaj