Which home loan is right for you?
Searching for your dream home in Australia? If yes, chances are you are also looking for the right mortgage product to finance your home!
Yes, most homebuyers cannot purchase a home without borrowing some money from the banks. But banks are not charitable institutions and charge borrowers interest on the money they lend, as well as, fees for the additional services they provide.
But does that mean every home loan is the same? Well, in a very basic way, each home loan is similar in the sense that there is a principal and interest component in every loan. However, that’s where the similarity ends!
Just like the fingers in your hands, all home loans are different. And, factors such as where you live, how long you intend to own the house, your risk appetite, etc. make certain home loans better suited to your situation than the others.
Are you aware of the various home loan options available in the market? Remember, knowledge is power and choosing the right home loan can save you tons of money! Let’s explore your options:
Fixed and Variable Rate Home Loans
When you take out a home loan, the first choice you are faced with is a fixed or variable rate
home loan. But what does that mean?
Fixed rate home loan
When you opt for a fixed rate home loan, the interest rate on your mortgage is locked for a
specified period of up to seven years. As a result, your repayment amount does not
change during this period irrespective of the changes in the market rate. At the end of the
fixed period, your loan reverts to the standard variable rate offered by the lender unless you
choose another fixed term.
- Your repayment amount does not increase even if the market rate increases
- A fixed rate makes it easier to budget as you know what you’d be paying each month
- You will continue to pay a higher interest rate even if the market rate crashes
- Less flexibility – you may not get a linked offset account, or allowed additional repayments and redraw facility
- Prepaying your loan during the fixed term is expensive as lenders might charge break fee
Variable rate home loan
When you choose a variable rate home loan, your interest rate goes up and down according
to the market rate. Consequently, you might find yourself paying less or more during certain
- You pay lesser when the interest rate goes down
- You can choose various features, at no cost, to save more money on your home loan
- As the repayments are not fixed, it is difficult to plan your expenditure
- If the interest rate rises suddenly, it can plunge you into financial difficulty unless you are well-prepared
Split rate home loan – The best of both the worlds!
Yes, you read that right. Some lenders allow you to choose a split rate home loan, which means you pay a fixed rate on a part of your mortgage and a variable rate on the remaining portion. This gives you the comfort of fixed repayments for some part of the mortgage and also lets you benefit from fluctuating rates on the other part.
Principal and Interest or Interest-Only
Most home loan repayments consist of principal and interest (P&I) components, which means you gradually pay down your loan in addition to paying the interest each month. However, with an interest-only (IO) loan, you only need to pay the interest on your mortgage for a pre-determined period, leaving the principal amount untouched.
Sounds lucrative, doesn’t it? Well, let us tell you that a P&I loan is your best bet in most cases. An IO loan is only suitable in certain conditions, such as when you are buying an investment property you intend to sell off in a few years.
When you take out a P&I loan, your repayment amount in the initial years is higher, because you are paying down both principal and interest. However, this also means that your repayment amount would reduce subsequently as you continue to pay down the principal. On the contrary, when you take out an IO loan, your repayment amount is very less in the interest-only period but could jump by up to 30 per cent at the end of the interest-only term.
Speak to a mortgage broker to know more.
Guarantor Home Loans
Most banks require you to put up a 20 per cent deposit before approving your home loan application. However, it could take an average couple up to 5 years to save for a deposit to buy a house in one of the capital cities of Australia. But what if you don’t want to wait that long to own your house?
Well, guarantor home loans have emerged as a popular option for many FHBs in Australia. By using your parents’ home as guarantee, you can secure your mortgage and borrow up to 95 per cent of the purchase price.
Note that your parents’ property is only used to secure a 20 per cent deposit for your home. Therefore, if you default on your mortgage, your parents would be responsible for repaying 20 per cent of your home loan amount. So, be sure of your repayment capacity before you ask your parents to secure your mortgage to avoid any sourness in your relationship in the future. (Learn more about guarantor loans.)
In case you don’t have a parent guarantee, you could choose to pay Lenders Mortgage Insurance (LMI) and borrow more than 80 per cent of the property’s price. And, if you are a professional with a high salary, you may also be eligible for a no-deposit home loan with one of our lenders.
Low Doc Loans
If you are self-employed or a small business owner, you might find it difficult to secure a traditional home loan due to lack of proof of regular income in the form of salary slips. In such a situation, you may apply for a low doc loan that requires lesser documentation but comes with a slightly higher rate of interest. You can always refinance with a traditional lender at a better rate once the required lending documentation is available.
A construction loan is designed to fund progressive stages of construction through gradual withdrawals. Besides, interest is only charged on the amount withdrawn, leading to lower repayments and significant savings over the life of the loan. If you are planning to construct your home from scratch, read more about construction loans.
Bad Credit Home Loans
Borrowers with bad credit are often turned away by conventional lenders. However, everybody deserves a second chance and there are specialist lenders in the market who offer home loans to borrowers grappling with bad credit.
As you might have guessed, these loans come with higher interest rates but can be utilised to overcome financial difficulties and bring your finances back on track. By gradually clearing your credit file and demonstrating good financial behaviour, refinancing your home loan with traditional lenders at better rates is also possible in the future.
Bridging loans are used to finance a new property while the existing one is not sold yet. Being interest-only, bridging loans make it easier to manage repayments between the settlement dates and can help you tide over until your first home sells.
Ready to buy your first home?
Now that you are aware of the most common home loan types in Australia, compare mortgage rates online to find a competitive deal for your purchase. Our rates are broker pre-negotiated, meaning they could be as much as one per cent lower than lender advertised rates elsewhere. You could also speak to a mortgage broker online and have your home loan queries answered by experts, absolutely free.
By Vidhu Bajaj,
HashChing Content Writer