How to choose the right home loan in Australia
There are different kind of mortgage loans available and all have their very own set of advantages and disadvantages which we’re going to look at in turn.
Buying a property is one of the biggest financial commitments a person can make. Whether it’s your first home, a bigger home or an investment property, it's a very exciting time. But it can also become a very stressful time with all the different kinds of mortgage loans available to Australians. Choosing the right loan can be daunting and confusing and that’s what we’re here to help you do.
#1) Fixed-rate home loans
Advantages of fixed-rate home loans
A fixed-rate home loan locks the interest rate of the loan for a given period of time. This means that you will pay the same instalment every month, irrespective of interest rate fluctuations.
This type of home loan gives you cash flow certainty. It makes it much easier to budget as you are certain of the amount you will need to pay towards your mortgage every month. For a lot of people, it offers great peace of mind.
Disadvantages of fixed-rate home loans
The main disadvantage of a fixed home loan is that the loans are quite inflexible and are generally more expensive since you can’t benefit from improving interest rates. If there are any interest rate decreases over the timeframe of your loan you will not benefit from it.
Most banks offer a certain period for the fixed rate, from one to five years. After this period, you can choose to continue with the fixed rate or you can switch to another option. Be certain to check what your options would be after the fixed term period. Lenders often charge a break-cost fee if you want to switch to another type of home loan.
#2) Variable rate home loans
For most home buyers this the loan of choice when it comes to mortgages. This type of loan relies on the Reserve Bank of Australia, who determine the cash rate and subsequently the fluctuation of interest rates. This means that borrowers could have lower repayment on some months, but if rates rise so will their monthly payments.
Although this can seem like a gamble to some, many borrowers choose this option because variable home loans usually give you other advantages. The extra repayment facility allows you to pay more than your normal monthly instalments. This will save you money on the interest of the loan and shorten the length of the loan.
If you do make additional payments on your mortgage, you can borrow some of the money you already paid. This can be used for any purpose, from home upgrades and a new car to a family holiday or even consolidating debts. There are no restrictions as to how you can use this money.
Variable home loans usually do not have break-cost fees. Should you wish to refinance your property this home loan option would not incur any additional costs.
#3) Split interest rate loans
If you find it difficult to choose between variable and fixed interest rate mortgages, another option available is to choose a split-interest rate loan. This is a loan feature that enables you to split your loan into separate accounts that attract different interest rates. You can choose how much you would like to allocate to each account, depending it is allowed by your lender.
This means that a certain portion of your home loan will be subject to a fixed rate, while the other portion will fall under the variable interest rate loan. You will be able to take advantage of the usual features of a variable interest rate loan on the portion of your mortgage that falls under the variable part.
#4) Low-deposit home loans
Most of the conservative types of mortgage loans require a deposit of 20%. Unfortunately, there is a lot of first-time buyers who cannot afford such a high deposit but would still like to own a property. A low-deposit home loan is a good option for these kinds of buyers.
If you are purchasing your first home as an owner-occupier (this means you plan to live in the home that you are purchasing) there are a range of mortgages available that only require a 5% deposit.
A low-deposit home loan will incur extra costs in the form of lenders' mortgage insurance. This is charged by banks and financial providers that offer loans for buyers who cannot afford a 20% deposit. This insurance covers the lender’s lost investment if you cannot honour your loan agreement and default on payments.
#5) Low document home loans
Low doc home loans are a mortgage solution for self-employed buyers. This can be a small business owner, contractor, freelancer or any type of person who does not traditionally earn their income and can’t prove their income easily in the form of payslips. You will not be asked to provide three years’ worth of financial statements to be eligible for a mortgage.
Low doc loans are designed for individuals who have a good credit rating and have the required deposit available. The lender will need to be comfortable that you will be able to repay the loan so you will have to provide some sort of proof of income.
This can be in the form of bank statements, interim financial statements, a letter from your accountant or tax returns. Interest rates charged on low doc loans are usually higher when compared to other home loans.
#6) Non-conforming loans
Non-conforming loans are designed for people who do not meet the standard lending criteria of their bank or other major lenders. These could be individuals who have a poor credit history or have previously declared bankruptcy. Although low doc loans and non-conforming loans are similar because neither uses the standard loan paperwork, they should not be confused.
The biggest difference between non-conforming and other mortgage loans is within the fee structure and interest rate structure of the loan. To help lenders compensate for the risk they take when offering this type of mortgage, borrowers will usually pay higher interest rates and higher entry and exit fees.
Once a non-conforming loan is secured, borrowers will be able to choose loan options similar to typical mortgage loans, where you will be offered a variable, fixed or split rate mortgage.
#7) Line of credit home loans
A line of credit mortgage is available to existing property owners who have an existing mortgage in place. If you require a large sum of cash relatively quickly, a line of credit is an easy way to secure that. This money can be used for any purpose, from medical expenses to home renovations or investment opportunities.
The money you borrow will be secured against the equity in your home. It functions similarly to a credit card. You will be given a pre-approved credit limit and you can use as much or as little of this as you need.
Interest will be paid on the outstanding balance. Since your property is used as security for the loan you will generally pay a lower interest rate compared to other forms of debt.
It is important to keep in mind that your home will be used as equity for the loan. If you manage the loan poorly, you could lose your equity and struggle to repay the loan.
Investigate all your home loan options
With so many different mortgage options available to Australians, it is imperative to take the time to investigate all options and choose the option that will suit you best.
Buying a home is one of the single most expensive items an individual will own in their lifetime. Doing your homework beforehand will save you money and make the whole process easier to manage.