LOAN TYPES

Common Types of Home Loan

Standard Variable Rate Home Loans

Considered to be the benchmark for the majority of lenders since it usually offers the most features like offset, redraw, portability, etc. The rate set by this loan is usually the highest of the banks’ variable rate products. Even though this is the most commonly chosen type of loan, only a handful of borrowers willingly pay the standard variable interest rate since they often take advantage of the discount rates found in Professional Packages.


Advantages:

• Greater flexibility than basic loans which have fewer features
• Repayments decrease when interest rates fall
• Offers flexibility and features like additional payments, honeymoon rates, redraw facility and portability
• Gives careful borrowers the ability to quickly redraw from their loan via penalty-free surplus funds

Disadvantages:

• The standard variable rate is higher than other products since it is packed with features
• Rise in official interest rates increase repayment amounts

Basic Variable Rate Home Loans

Generally have lower interest rates. However, this type of home loan has fewer features compared to a standard variable loan. For example, basic variable loans may not always offer a redraw facility. This type of loan is usually chosen by borrowers who want a consistent repayment amount during the course of the loan. The interest rate for this type of loan is dependent on the movement of official interest rates.


Advantages:

• Repayment amounts fall in the event of official interest rates fall
• Allows quick repayment of the loan by not imposing advance payout penalties

Disadvantages:

• Repayment amounts increase in the event of official interest rate increases
• Lack of features that could potentially save you money

Fixed Rate (Principal and Interest) Home Loans

Loans where the borrower’s interest rate and repayments are fixed for a set period, usually from 1 to 5 years (sometimes longer). Only a small percentage of home buyers choose fixed rate loans.


Advantages:

• No increase in repayments in the event of official rate increases
• Allows borrowers to budget funds more precisely
• Perfect for borrowers who are conscious about the fluctuation of rates

Disadvantages:

• No decrease in repayments in the event of rate decreases
• Limits additional payments
• Sets penalties for early mortgage payout

Split Rate (Principal and Interest) Home Loans

Have one portion fixed and one portion variable, usually on a 50-50 basis. In other words, it’s a two-way bet on whether you expect rates to increase over the medium term or not. It therefore provides some peace of mind for borrowers who are concerned with rate movements.


Advantages:

• Allows budgeting to be more manageable
• Suitable for borrowers who are conscious about the fluctuation of rates
• Additional payments are allowed

Disadvantages:

• Repayments are dependent on rate rises
• Amount of allowed additional payments is limited

Interest-Only (Principal and Interest) Home Loans

Require lower repayments because the borrower pays only the interest on the principal during the course of the loan. After the interest only period expires, the borrower must proceed with the Principal and Interest Repayments for the remaining life of the loan.


Advantages:

• Low initial repayments
• Lowers the cost of purchasing a residential property

Disadvantages:

• Higher repayments after the expiration of the interest only period
• Loan is converted to principal and interest repayments
• Borrowers’ ability to repay the home loan will be assessed based on the principal and interest repayments

Line of Credit Loans

Revolve around a property’s equity and provides access to financial funds when necessary. This loan type of home loan is an excellent way to grow investment funds by releasing funds up to a set limit. The loan balance is reduced each month by incoming cash flow and at the same time increased by the withdrawals or interest charges.


Advantages:

• Borrowers can utilise the funds as needed and make flexible repayments
• Flexibility
• Interest rates for line of credit home loans are lower compared to personal loans or credit cards

Disadvantages:

• Equity of residential property might decrease
• Interest payments must be regularly made
• Higher interest rate
• Can become expensive if carelessly utilised

Low-doc Home Loans

Suitable for investors or self-employed borrowers looking to refinance, purchase or renovate. The loan applications are made on the basis of self-declaration and hence can often attract a higher home loan interest rate than the normal ‘full doc’ loan, which is more suitable for people who can show tax returns or evidence of wages.


Advantages:

• Simple proof of income
• Perfect for self-employed individuals
• Availability of fully serviceable options like variable or fixed rates, redraws, etc.
• IO or P&I loans

Disadvantages:

• Higher interest rates

Discount variable/honeymoon/introductory Loans

Variable rate loans with a discounted interest rate off the standard variable rate (commonly discounted between 0.25% and 1%), lasting for a certain period of time (usually one year). It then, with most lenders, reverts to a standard variable loan.


Advantages:

• Low interest rates for the initial term
• Quick reduction of the principal if extra repayments are made
• Depending on the lender, offset accounts can be provided

Disadvantages:

• Most honeymoon rate loans revert to the standard variable rate, which is usually more expensive ongoing
• In the case of a professional package, the lender can decide to limit the interest rate discount after the expiration of the introductory rate.
• Early repayment penalties might be applicable during the initial period
• Limits on other loan features or additional repayments could apply in the duration of the introductory rate.

Non-Conforming Home Loans

Offered to people who have difficulties in obtaining a home loan due to bad credit history. The borrower usually has to contribute a bigger deposit as a requirement. These home loans are also suitable for ex bankrupts.


Advantages:

• Offers majority of mainstream loan features like Principal & Interest or Interest Only, redraw, split loans etc.
• Allows people with borrowing difficulties to obtain funds
• Disregards bad credit history

Disadvantages:

• High interest rates, which is based on the situation of the borrower
• Possible higher establishment and exit charges