When it comes to choosing a home loan to purchase your home, it’s likely you’ve only thought about how much your monthly repayments are. However, have you stopped to think about the various types of home loans available and how each could affect your financial future?
Some types of home loans offer more flexibility, while others are designed to provide specific benefits for certain situations. Before you sign on the dotted line for any mortgage, take a moment to think about which type of home loan might be right for you.
Variable home loan
A variable home loan is one with a variable interest rate. Most people are aware that variable interest rates can rise and fall depending on the market, which also means that monthly repayments can fluctuate in line with those changes.
Variable home loans offer plenty of flexibility. You have the ability to make extra repayments without penalty, which is ideal if you intend on paying off your home loan faster. Many variable home loans also offer the option of redrawing additional payments if you need that money later or linking an offset account to help minimise the amount of interest you pay.
Fixed rate home loan
A fixed rate home loan lets you lock in your interest rate for an agreed period of time. Most lenders offer fixed terms that range between 1 and 5 years.
During a fixed rate term, your interest rates won’t be affected by any fluctuations in the official cash rate. Your repayments also won’t change during the fixed term, which is ideal if you’re concerned about staying in control of your budget.
However, many fixed rate home loans don’t allow for much flexibility. Most lenders limit the amount of extra repayments you can make off your home loan throughout the year. Most do not allow you to redraw any extra payments you make until after the fixed term has ended.
Split home loan
If you’re not sure whether to stay on a variable interest rate or to choose a fixed rate home loan, it might be possible to opt for a split home loan. Essentially, you split your loan into two separate pieces so that one portion remains on the variable rate and allows you the flexibility you want, while the other portion is locked into a fixed rate so you can’t be affected by any fluctuations in the market.
Principle & interest home loan
No matter whether you choose a variable, fixed or split home loan option, the majority of mortgage repayments are calculated on a principal and interest payment option. This means the payments you make are ‘amortised’, or calculated so that each payment you make is comprised of a portion that covers the interest charges due and the rest starts to pay down your home loan balance. If you only ever make the minimum repayment due, you will pay off your home loan in 30 years.
Every time you make a repayment on a principal and interest home loan, you reduce your outstanding balance a little more. Making extra repayments or choosing to make payments weekly or fortnightly can speed up your efforts and make it easier for you to pay off your home loan faster.
Interest only home loan
An interest only home loan is set up so that you only ever pay the amount of interest due on your mortgage each month. The amount you pay doesn’t reduce your outstanding balance at all. Interest only home loans are popular with property investors because only the interest payments are tax deductable.
Line of credit
A line of credit home loan is also known as an equity line or revolving line of credit. No matter what your maximum credit limit might be, you only ever pay interest on the amount of money you’ve drawn down from your available limit. There are no set monthly repayments to make each month, as long as you meet the interest charges and any other fees that are due.
Lines of credit offer homeowners the opportunity to utilise the equity in a property to be used for other purposes. This type of home loan is often attractive to investors who may need a ready source of funds to complete renovations or repairs.
LoDoc home loan
Not every borrower has a handy payslip from an employer to hand to the bank to verify their income. In fact, many self-employed people and small business owners often find it difficult to verify exactly how much they earn based solely on their financial returns, especially if they haven’t done their tax returns yet.
Yet a LoDoc home loan is specifically designed to suit those people who have plenty of revenue, but don’t have the required documentation to prove that income to lenders in order to borrow money.
Bridging home loan
If you’re thinking about buying a new home before selling your existing home, you might need a bit of additional finance from a bridging home loan. The objective of a bridging home loan is to provide you with the funds you need to buy the new property while you’re still living in the old home.
You then have up to 6 or 12 months to sell the old property. The benefit is that you don’t have to sell your existing home first, move home and pay rent in a rental property until you find your new home.
When you receive the funds from the sale of your old home, you pay down the amount you borrowed on your bridging loan.
Non-conforming home loan
Financial difficulties happen to everyone at some stage in life, but that shouldn’t stop you from applying for a home loan. Yet traditional lenders will decline a home loan application from a borrower with defaults or other credit problems.
A non-conforming home loan offers people with credit problems a second chance to obtain the finances they need. Most non-conforming loans often come with higher-than-usual interest rates.
However, if you manage your home loan well and keep up with your payment obligations every month, it’s possible to re-enter the traditional home loan market in the future.
Reverse mortgage
A reverse mortgage allows you to use the equity you’ve built up in your home to use however you want. Once you near retirement age, it’s possible to borrow against the equity in your home without having to verify your income or without having to make any payments.
Basically, you’re able to borrow a small percentage of your home’s value to use for whatever you like. It’s up to you whether you use those funds to pay off your existing mortgage balance, buy a new car, take that long-awaited holiday, or put it towards other investments.
You aren’t obligated to repay the amount you borrow until you sell the home, or until the last remaining owner passes away. Until that time, any interest charges owed on the money borrowed is added back onto the loan amount.
As you’re only able to borrow a small percentage of the home’s value, the amount of interest that is capitalised onto the loan amount adds up relatively slowly, so there is always plenty of equity remaining in the asset.
There are plenty of different types of home loans available. Before you make a decision about which home loan is right for your needs, take the time to discuss your financial situation with an Assured Home Loans consultant to work out what options might be available and which is best for you.
This article provides general information which is current as at the time of production. The information contained in this communication does not constitute advice and should not be relied upon as such as it does not take into account your personal circumstances or needs. Professional advice should be sought prior to any action being taken in reliance on any of the information.
