There are as many different types of home loan as there are borrowers. For those of us who aren’t financially savvy, it can be overwhelming and confusing. But it doesn’t have to be. While you may need expert advice at some point, there are a few basic loan types in Australia that are worth understanding before taking any steps towards a home loan.
Home loans at a glance
Principal and interest home loans
This is the most popular type of home loan, mainly because it’s the standard loan that most lenders offer. With this loan, you have a certain time frame (25 or 30 years) to repay the principal and the interest involved. Most people believe this is the only option to pay off your home loan, however this is not true.
Interest only home loans
Interest only loans are the most popular type of loans for property investors, as they offer better cash-flow and preserve tax incentives over time. They’re a lot more flexible compared to the traditional principal and interest loan, because you decide how much you want to pay into the loan each month.
Line of credit mortgage loan
Line of credit is a good option for people who are considering renovation, because you only use part of the loan as you need it, up to a certain limit.
Offset account loans
Put simply, with an offset account loan, you can deposit your salary, savings or other income into the loan account. This then counts – or offsets – against your loan balance, which means you could pay less interest over the life of the loan. Offset accounts are very popular with borrowers, because it provides a daily interest saving with cash sitting in the account.
Interest rates: fixed, variable or split?
Interest rates go up and down, largely determined by the Reserve Bank of Australia (RBA) as it tries to keep the economy prosperous. Australia’s cash rate* is currently 1.5%, which means it’s relatively easy to borrow at the moment.
Banks generally follow the RBA’s lead on interest rates – if the RBA raises the interest rate, so do the banks.
A fixed rate loan is great for people who would like to have certainty going forward. It gives them the confidence of meeting loan repayments, knowing the rate won’t go up during the term. The downside is when the interest rates go down, they don’t get the reduction.
The variable rate from the same major banks is as low as 3.7% at the moment. This means if the bank lowers its interest rate, your repayments go down. It also means if they go up, your repayments increase. These loans are good for people who sometimes want to make more than the minimum payments without incurring a penalty.
A split interest rate means some of your loan is repaid on a variable rate and the rest is fixed. It allows you to benefit from both fixed and variable rates. If the interest rate goes up your repayments on that part of the loan stay the same – if they go down, you pay less for the variable amount you borrowed.
Consult a home loan specialist
The best way to get a clear idea as to what type of loan is best for you is to see a home loan specialist for lending solutions. They have the experience to help you discover the best solution for your needs, helping make your transition to home ownership as smooth as possible.
To get in touch with a Financial Specialist at Gordon Wealth, click here, or call us on 1300 05 05 88.
*Interest Rate Decisions from 2016.
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