Types of Home Loans
Contact an ADNA Mortgage Specialist for more information about different types of mortgage loans and features and we’ll be happy to help you find the one that suits your needs and preferences.
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- 1. Variable Rate Mortgage
Variable home loans can be of two types: Basic and Standard.
A Basic variable home loan is just that – a plain and simple mortgage with very few features. Borrowers do not pay for features they do not use. The features provided will vary from lender to lender. This is ideal for borrowers who want to make their repayments with little else.
A Standard variable home loan is more full-featured and gives you additional features such as:
- Redraw & offset facilities
- Ability to make additional lump sum payments
- The option to split your loan
- Choice of repayment options
- Choice of loan terms up to 30 years with most lenders
Advantages
- The variable home loan interest rate is generally lower than that of a fixed rate mortgage.
- Your actual home loan repayments will normally be lower than for a fixed rate mortgage.
- You can usually make extra repayments without penalty with a variable interest rate, which gives you more flexibility.
- You usually have access to a redraw facility on variable home loans, which further reduces your interest payments.
Disadvantages
- Attractive introductory interest rates are usually only available on new variable interest rate home loans.
- Your regular repayment amount is not fixed, which brings uncertainty when it comes to budgeting for mortgage payments.
- When variable interest rates increase so will your interest rate unlike that of a fixed rate.
- Having the extra features can be costly if the features are not used.
Introductory Rate Home Loan
This is sometimes known as the ‘honeymoon’ rate loan. This type of loan has a reduced rate of 1% – 1.5% below the standard variable rate offered for the first 6 months to a year of the term of the loan then reverts back to the lenders standard variable rate after the honeymoon period. Usually targets first home buyers or refinance customers.
This type of loan usually has numerous terms and conditions and may work out to be more expensive in the long run. A lot of the time they have deferred establishment fees, monthly account keeping fees and switching fees.
- 2. Fixed Rate Mortgage
You can’t beat the predictability of a fixed-rate home loan.
This loan type is available for between 1 and 5 years. At the end of the fixed period, you usually have the option to refix for a new term or have the loan revert back to the standard variable interest rate. The opportunity to refix the interest rate may incur additional costs.
During the fixed period the mortgage repayments and interest rate remain constant. Extra repayments are normally not permitted on this type of loan.
Advantages
- Budgeting your finances is easier, as your home loan repayments remain consistent even if interest rates rise.
- Eliminate the risk of defaulting on your home loan as a result of variable interest rate increases.
- Make additional payments of up to 5% for most Fixed mortgages.
- Some fixed home loans have offset accounts and redraw facilities.
Disadvantages
- A fixed home loan interest rate can, at times, be higher than a variable home loan interest rate.
- If interest rates fall, the home loan repayment will not reduce as your repayment amount is fixed.
- Fees may apply if additional repayments of more than 5% are made in a 12 month period.
- 3. Split Rate Mortgage
This type of loan enables the borrower to split their loan into two portions – a fixed rate interest rate portion and a variable interest rate portion.
You have the option of selecting the percentage you would like fixed and the percentage you would like variable, as long as the minimum fixed amount is covered, as per the individual loan requirements.
Advantages
- Enjoy fixed-rate security as well as the ability to pay off the variable portion of your mortgage sooner.
- Access features that only come with variable interest rate home loans, such as a line of credit and others.
Disadvantages
- You may incur additional establishment fees and if you make extra repayments or pay off the fixed portion of your home loan sooner.
- You won't receive the full benefit of interest rate reductions that a variable home loan provides.
- You may incur additional fees for changing the split ratios more than the allowed number of times.
- 4. Interest Only Mortgage
If you already have a certain amount of funds then the lower repayments can help you free up cash flow for other things.
While it is possible that an increase in the property’s value will cover the principal component of your home loan further down the track, this is something that must be weighed up carefully. The interest-only period of the home loan is available for up to 10 years and may be extended upon application.
Advantages
- If you need to temporarily free up cash flow – for example, for setting up your home, renovations or to pay for moving costs etc.
- If you're looking to get into real estate investment and looking for capital growth then an interest-only loan can help you do so on a modest budget.
Disadvantages
- Once the interest-only period of your home loan expires, there can be a substantial increase in the repayment amounts.
- None of your repayments are being applied to the home loan principal, which will leave you with very little home equity. You will need to rely on capital growth of the property.
- 5. Low Doc Mortgage loans
Low doc’ is short for low documentation home loan. It is suitable for the self-employed and anyone else who is unable to provide full financial statements or other evidence of income when applying for a loan.
This type of loan is a flexible financial solution that can help you obtain a mortgage if you are a business owner, contractor or freelancer.
With a low-doc loan, you have the option of ‘self-certifying’ your income without needing to provide proof of employment as you would with most other loan types. However, you still have to have a good credit history and this will be assessed. You will also be required to sign a declaration stating that you have the capacity to service the loan.
Interest rates and repayment amounts also tend to be higher to compensate the lender for the increased risk. The majority of lenders will also require that you take out mortgage insurance to minimise their risk.
Advantages
- Less paperwork required during the home loan application process.
- The application process for a low doc home loan is quicker for the self-employed than a full doc home loan.
- Interest rate discounts may apply after a period of successful home loan repayments.
Disadvantages
- The interest rate and repayment amounts are higher than a full doc home loan.
- Lenders Mortgage Insurance is normally required when taking out a low doc home loan, which adds to the cost.
- 6. Line of Credit
A line of credit home loan allows you to borrow money up to a specified limit, repay that amount and then borrow up to the limit again numerous times.
Such a mortgage operates similar to a credit card – you draw down as much as you need and then pay it back. They are also known as a revolving line of credit or equity line of credit loans. They are generally used as the borrower’s one and only transaction account allowing for salary crediting and utilising all excess cash to reduce the mortgage principle.
There are two options to choose from:
Principal and Interest Line of Credit
A P&I loan has a reducing balance, meaning every dollar goes towards paying down your home loan sooner, saving you years of re-payments on your loan and thousands of dollars in interest. The benefit of this option is that you avoid the common trap with a Line of Credit where you don’t pay down the principal and find yourself still owing the full loan amount 10 years into the home loan.
Interest Only Line of Credit
Where the home loan credit limit remains constant for the 10 year interest only period on this fully transactional line of credit. The benefit of this option is that you can use the equity in your home for an investment property, shares or other personal uses.
Advantages
- You only pay interest on the amount of money you actually borrow, not on the full available balance.
- Once the line of credit has been established, you are able to access the funds when required without delay.
- Once the borrowed amount has been repaid, you have access to the full line of credit amount again.
- A line of credit comes in handy during times of sporadic cash flow or for short term finance needs. Flexible and your money is at call.
Disadvantages
- Interest-only repayments on a line of credit can result in your still owing the full amount, as principal remains unpaid.
- A secured line of credit means that your home acts as collateral and – if unpaid – the full amount is added to your mortgage.
- Usually more expensive than other home loans.
- You need to be disciplined with a line of credit because you can use it to pay for other purchases (such as holidays, everyday living expenses etc) which means you could end up paying interest to fund your lifestyle for many years to come.
- 7. Construction Loans
The main feature of our construction mortgage is that you can stagger the drawdowns of the various parts of your loan to correspond with the stage of development that your property is at.
After construction is complete, your loan will automatically revert to a standard variable rate home loan rate of the lender. Progress payments made during the construction phase may be interest-only. This type of loan is available to for both registered builders and owner-builders, however only a limited numbers of lenders will provide loans to owner builders.
Advantages
- Funds will be paid to you in drawdowns ensuring you only pay interest on the portion of the mortgage you have used.
- Option to make interest only payments for the land portion prior to and during the construction process.
- You have up to 24 months to complete construction after settlement of land giving you the chance to plan things out.
Disadvantages
- If you're an owner-builder then the maximum Loan to Value Ratio (LVR) can be quite lower than the usual 80%. Normally up to 90% LVR is lent.
- Funds are released only at predetermined stages after proof of work has been established.
- Council approved plans and a fixed price tender are required at time of application.
- 8. Bridging Loans
A bridging loan was created to act as a solution for those who want to buy a new property while still waiting for their existing one to sell. They are also known as a ‘relocation’ loan. It conveniently gives you the opportunity of not waiting for your current property to sell in order to be able to say ‘yes’ to your dream home.
How this loan works in a practical sense is that both properties are used as collateral until such time that the existing property is sold. These are interest-only loans and the interest rate can be relatively high as you will be paying it on two properties until such time that your old home is sold.
Advantages
- Bridging loans can normally be arranged in a shorter period of time.
- Relatively little documentation is required to set up a bridging loan.
- A bridging loan is useful when you're in the process of purchasing your next home while waiting for your current one to settle.
Disadvantages
- Bridging loans are typically more expensive than other mortgage types due to the increased risk to the lender.
- Additional fees and costs may be incurred with a bridging loan, which get amortised over a shorter period of time.
- 9. Family Guarantee
With the ever-increasing price of property, it may not be realistic for you to save up a large-enough deposit to buy a residential or investment property anytime soon. However, if you have an immediate family member who has a good equity stake in their property, then you can ask them to act as a guarantor for your loan. This may give you the ability to borrow up to the full value of your desired property.
In order to make use of the Family Pledge loan, you still need to be able to make repayments towards the loan on an ongoing basis but the initial requirements for a deposit won’t apply. Once you have paid off enough of the loan and your equity in the home is substantial enough, you can then look at refinancing the loan to pay off your relative. A Family Pledge loan is a great option to help you get your foot in the door in a hot property market.
Advantages
- You can buy a home or investment property without having to provide a deposit with most lenders.
- You can borrow up to 100% of the purchase price and a further 10% to cover the purchasing costs.
- It is possible to redraw or re-finance to repay the family member once sufficient equity is built up in the property.
Disadvantages
- It's necessary to weigh up the risk of getting family involved as relationships may be strained if something goes wrong.
- 10. Bad Credit
Having a bad credit score doesn’t mean that you’re not able to get into your own home. It just means that you will have to approach lenders outside of the big banks. The process of applying for a ‘bad credit’ home loan is a little more involved than for a traditional loan.
If your credit history is not great then you will generally have to have a larger deposit and the rates will be higher than other mortgage types. You also have to check that all of your debts are paid prior to submitting the application. However, a ‘bad credit’ mortgage presents a real opportunity for you to get your finances back on track and own your own home.
Advantages
- You can get a home loan even if you've been turned down by big banks due to your credit history.
- A 'bad credit' home loan can be your fresh start in order to get your financial situation back on track.
Disadvantages
- Often, interest rates will be much higher than a traditional type of home loan.
- 11. Low Deposit
If you’re currently renting, then it’s likely you’re helping someone else’s home owner dreams come true, but what about your dreams? We all want a place to call our own. Home ownership is the goal for most Australians, bringing the freedom and flexibility to create your perfect space (without consulting a landlord!)
Today, the pressure to actually get into the housing market has never been greater, thanks to surging property prices in an increasingly competitive climate. Unfortunately, with day to day living expenses and bills, not to mention rent, saving for a deposit to purchase your own home can seem impossible.
A low deposit home loan allows you to jump straight into the property market, with just a small deposit saved. You can get pre-approval and begin house hunting immediately, far sooner than most would expect, especially when you consider the years it would take to save a sizeable deposit with outgoing rental expenses.
Advantages
- Allows you to get into the property market quickly at an opportune time.
- Stop wasting money on rent and start investing in your own future straight away.
- Start creating wealth and equity sooner.
Disadvantages
- Low deposit home loans attract higher interest rates.
- Mortgage insurance is required on loans where the deposit is less than 20% so expect higher entry costs.
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