Types of home loans
With thousands of different home loans on
- Principal – the amount of money you borrow; and
- Interest – how much you pay to borrow the money, which is calculated on the outstanding principal.
Let’s take a closer look at how some of the types of home loans can differ.
Principal & Interest / Interest Only
When choosing a home loan you have a choice between Principal and Interest (P&I) or Interest Only (IO) repayments.
P&I loans mean when repaying your loan you are making repayments on both the interest and the principal loan amount. These types of loans generally have a lower interest rate than IO loans.
IO loans mean you are only paying loan interest, and not paying back any of the principal amount borrowed. You can generally only have an IO loan with the same lender for a period of up to five years, and the interest rate is typically higher than a P&I loan. Once the IO period ends, your repayments will likely jump higher as there is now less time remaining on your loan term to repay the principal portion of your home loan.
Variable rate loans
This is a popular type of home loan in Australia. The interest rate you pay may vary in line with movements in market interest rates, so you can expect the repayments to vary (up and down) over the life of your home loan.
With this type of home loan the rate you pay – and the home loan repayments, are fixed for a set period, usually between one and five years. This makes it easier to budget for repayments and you are protected from increases in market interest rates. The downside is that if rates fall, you could end up paying more than necessary.
Many lenders will let you fix one part of your home loan, while the remaining portion has a variable rate. This can give you the best of both worlds – some protection from rising rates though still with the ability to benefit from any rate cuts.
Now, within the categories of
Basic versus standard
‘Basic’ home loans are
The important thing is to choose a home loan that only has features you are likely to use now or in the near future, so you don’t pay a higher interest rate than necessary.
An offset home loan involves a savings or transaction account that is linked to your home loan. Instead of being paid interest on the linked account
A package home loan, sometimes called an ‘ongoing discount’ home loan, combines a home loan with other financial products – usually a transaction account and/or credit card.
You can generally expect fee waivers on some or all of the bundled products plus a discount on the home loan interest rate that usually lasts for the life of the home loan. On the downside, you may be asked to pay an annual package fee. This makes it important to weigh up whether the fee savings and rate discount are worth more than the annual package fee.
Line of credit
This type of home loan allows you to draw from a fixed amount at any time, to pay for whatever you want – which could be shares, renovations, or even a holiday.
It’s like having a credit card with a big limit, but your home still acts as security for the home loan. You only pay interest on the funds you use, but you need strong financial discipline to ensure you pay off the principal as well as the interest.
These are home loans designed for self-employed people who don’t have all the financial documents providing proof of income normally required to secure a home loan. A low-doc loan can be either fixed or variable though the interest rate is generally higher than for a normal variable or fixed home loan. The rate may be reduced after a few years with a good repayment history.
Navigating a path through the mortgage maze can seem confusing – especially with so much choice available. But, you won’t get lost with your Aussie Broker by your side
Introductory vs ongoing rates
Some lenders may offer a low introductory rate to help you ease your way into a home loan. It can sound like a good idea but be sure to check the rate you’re paying once the introductory period comes to an end. The rate you pay can be higher and you need to be sure you can comfortably make the jump to higher repayments.
What is a honeymoon period?
When it comes to home loans, a honeymoon period is a temporary period, often lasting anywhere from a few months to one or two years, when the rate on your loan is lower than normal. The idea is that this gives you an opportunity to get into the swing of living with a home loan or have a bit of extra cash to spend on things like kitting out
Just as real honeymoons don’t last forever, at some stage your loan’s honeymoon period will finish up. When that happens you need to be ready for the loan rate to rise to what is called the ‘revert rate’. This is the ongoing rate you’ll pay on your loan.
Navigating a path through the mortgage maze can seem confusing – especially with so much choice available. But, you won’t get lost with your Aussie Broker by your side. We will help you understand how different types of home loans
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- Chapter One : Getting started
- Chapter Two : Your Dream Home
- Chapter Three : Money Matters
- Chapter Four : Ways to Purchase
- Chapter Five : Understanding Interest Rates
- Chapter Six : Understanding Home Loans
- Chapter Seven : Lending Sources
- Chapter Eight : Getting Your loan
- Chapter Nine : Choosing a Home
- Chapter Ten : Steps to Settlement