Different Loan Types

A new home or a new loan. Which is easier to find?

There are so many different loans out there.
The problem is how do you find one that’s right for you?

When you’re looking for a new home you probably have a good idea of what you’re looking for – what it looks like, what size it is, even where it’s located, maybe even right down to the street. But when it comes to a loan, where do you start? There are hundreds of loans from a huge choice of lenders. And there are new products coming into the market all the time.

As a broker, our job is to help you find one loan out of the hundreds available that suits your individual needs. What’s more, we’ll help manage the whole process for you. We’ll assist you with the paperwork, and manage the application process right through to approval.

Of course with all loan products there are pros and cons, so it’s a good idea to get familiar with the different loan types.

Here’s a quick look at the main types of loans and
some of their advantages and disadvantages.

VARIABLE

Standard variable loans are the most popular home loan in Australia. Interest rates go up or down over the life of the loan depending on the official rate set by the Reserve Bank of Australia and funding costs and the individual decisions of each lender. Your regular repayments generally pay off both the interest and some of the principal.

You may also be able to choose a basic variable loan, which offers a discounted interest rate but has fewer loan features, such as a redraw facility and repayment flexibility.

pros

If interest rates fall, the size of your minimum repayments will too.
Standard variable loans generally allow you to make extra repayments. Even small extra payments can cut the length and cost of your mortgage.
Basic variable loans often don’t come with a redraw facility, removing the temptation to spend money you’ve already paid off your loan.

cons

If interest rates rise, the size of your repayments will too.
Increased loan repayments due to rate rises could impact your household budget, so make sure you take potential interest rate hikes into account when working out how much money to borrow.
You need to be disciplined around the redraw facility on a standard variable loan. If you dip into it too often, it will take much longer and cost more to pay off your loan.
If you have a basic variable loan, you may not be able to pay it off quicker or get access to money you have already repaid if you ever need it.

SPLIT RATE LOAN

Your loan amount is split, so one part is variable, and the other is fixed. You decide on the proportion of variable and fixed. You enjoy some of the flexibility of a variable loan along with some of the certainty of a fixed rate loan.

pros

cons

INTEREST ONLY

You repay only the interest on the amount borrowed usually for the first one to five years of the loan, although some lenders offer longer terms. Because you’re not also paying off the principal, your monthly repayments are lower. At the end of the interest-only period, you begin to pay off both interest and principal. These loans are especially popular with investors who plan to pay off the principal when the property is sold. This strategy is usually reliant on the property having achieved capital growth before it is sold.

pros

cons

The overall cost of the loan is likely to be significantly higher.
At the end of the interest only period you have the same level of debt as when you started.
If you’re not able to extend your interest-only period your repayments will increase at the end of the interest-only period.
You could face a sudden increase in regular repayments at the end of the interest-only period.

LINE OF CREDIT

You can pay into and withdraw from your home loan every month, so long as you keep up the regular required repayments. Many people choose to have their salary paid into their line of credit account. This type of loan is good for people who want maximum flexibility in their access to funds.

pros

cons

INTRODUCTORY / HONEYMOON

Originally designed for first-home buyers, but now available more widely, introductory loans offer a discounted interest rate for the first 6 to 12 months, before the rate reverts to the usual variable interest rate.

pros

cons

LOW DOC

Popular with self-employed people, these loans require less documentation or proof of income than most, but often carry higher interest rates or require a larger deposit because of the perceived higher lender risk. In most cases you will be financially better off getting together full documentation for another type of loan. But if this isn’t possible, a low doc loan may be your best opportunity to borrow money.

pros

cons

Need more info?

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