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Types of Home Loans in Australia

Home loans are an essential part of property buying. Unless you can afford to purchase a home up-front, most people will need a home loan, but with the abundance of loans out there, it can be hard to choose which one is right for you.

Here, we break down the most common types of home loans in Australia.

Fixed-Rate Loans

Fixed-rate loans are pretty straightforward. They come with, you guessed it, fixed rates. The loan interest rate lasts about one to five years, typically with a rate higher than the current loan variable. This is good for homeowners’ budgets because they know the interest rate won’t move. Keep in mind, depending on the cash rate, interest rates can rise or fall.

Since these loans are locked in a fixed term, homeowners can breathe easy knowing the exact amount they will need to pay every month. However, features like extra payments aren’t available, and switching to another loan can be difficult and will usually incur a break cost fee. On the bright side, fixed-rate periods can be adjusted, or the borrower can sign another contract.

Guarantor Loans

First-time home buyers tend to use guarantor loans. These loans allow the homebuyer to borrow over 80% of the home price without paying for mortgage lenders’ insurance. This works by using a family member’s or parents’ home as security for your mortgage.

This means that in the event you can’t pay for your mortgage, the guarantor can. Guarantor loans are helpful for those with lower incomes but who want the benefits of owning a home. This type of loan is an excellent option for those who are first-time homebuyers but have the extra help should they need it.

Non-Conforming Loans

These loans are helpful for those with bad credit history. Non-conforming loans help those who are unemployed, meaning their income history is little to none.

With this loan, you can borrow over 80% of the home value and don’t have to go through standard loan paperwork. Non-conforming loans are great for those without other options. However, they usually have higher interest rates than most other options.

Line of Credit Loans

Home equity or line of credit loans let homeowners make renovations on their house. If you’re looking to fix or replace a part of your home, a line of credit loan is a great option.

A homeowner can only obtain an amount depending on the equity they have on their property, either used in increments or a lump sum. When using a line of credit loan, make sure to pay back all you’ve borrowed, or else your loan term will be extended.

Low-Doc Loans

Low documentation loans, or low-doc loans, are great for those whose income doesn’t obtain standard documentation. Freelancers, self-employed people, and business owners who don’t have standard income documents can use this loan.

This type of loan requires certain documents like business statements or activity statements to provide credibility. Keep in mind, low-doc loans carry higher interest rates and fees compared to other loans.

Interest Only Loans

This loan is common among investors, especially if their goal is to sell again. Interest-only loans have payments only towards the interest, minus the principal.

It’s also great for younger or first-time homebuyers or those with low incomes. However, this interest-only period lasts seven years. At that point, the homeowner will pay interest and the standard principal of the loan.

Variable Rate Loans

Lastly, we have the most common home loan around: variable rate loans. This means, based on the Reserve Bank of Australia, whenever interest rates fall or rise, so will borrowers’ variable interest rates.

While this seems a bit erratic to some, variable rate home loans are great for several reasons:

The choice of extra payments: The borrower can make additional payments each month, which shortens the loan time and eliminates lingering interest.
Offset account: The borrower can set money aside each paycheque to offset the monthly mortgage repayment, subtracting from the principal.
Redraw facility: If you’ve made additional payments on your loan, you can borrow some of the money you’ve paid for other purchases, like a new car, home upgrades, or holiday.

Knowing which loan is right for you can be tricky. When you’re ready to buy a home, sit down with your bank and discuss what loan choice is best.

Are you buying a new home and want to narrow down your loan options? Check out Fixed Rate Mortgage for all your mortgage needs.