Home Loan Types

Basic variable loans typically offer lower interest rates and fewer features than the standard variable loans. You often have the option to pay for any additional feature required. Interest rates and repayments will vary throughout the loan term.  

Some typical benefits are relatively low interest rate, lower repayments, you can make extra repayments whenever you wish and redraw facility is often provided. This type of loan may not have the same features or flexibility as other variable loans, for example not having the option to have an offset account.

Introductory or Honeymoon loans are generally popular for first home buyers, however this doesn’t mean that these are the only people who can access these products. Honeymoon loans give individuals a discounted interest rate for the first six to twelve months depending on the product. After this period expires, the loan generally reverts to the lenders standard variable product.

Although it may be tempting to take out a Honeymoon loan because of its reduced interest rate, it is important to watch out for restrictions or exclusions on other aspects of the loan. Many lenders will limit the availability of features (such as redraw facilities, repayments etc.) to offset the lower interest rate. In some cases this can mean less flexibility over the life of the loan.

Variable rate loans often provide additional flexibility and are the most popular type of home loan in Australia. As the name suggests the interest rate is variable and therefore fluctuates with the Reserve Bank of Australia’s movement and the cost of the financial institution sourcing funds to lend. Variable rates are generally broken into two categories by financial institutions: basic and standard.

As the name suggests the basic variable rate only covers the basic home loan features. On these loans you won’t have access to features such as a redraw facility; however this also means the interest rate is generally slightly lower than other loans.

The standard variable rate is traditionally slightly higher than the basic variable, however along with this you receive extra features such as a redraw facility, repayment frequency flexibility, portability and the option to pay in advance.

Variable loans generally require closer monitoring, especially if you over capitalise and interest rates rise. It is important to make sure that you budget and plan for the future should interest rates rise, to ensure that you are able to meet the required repayments.

If you are building your own home or investment property, a construction loan may be suitable for you. This loan requires a fixed price building contract from a registered builder. These loans are typically interest only for the period of building period and then convert to principal and interest repayments once the building is completed unless a longer interest only period is negotiation.      

A construction loan allows you to draw money as is required whilst building progresses. These drawdowns typically known as progress payments would normally occur 6 times to complete the construction. When applying for a construction loan, a “fixed-price building contract” and “council approved plans” are required.

If you are looking to upgrade your home, let Property In Demand Financial provide you with the ability to purchase your new home, without having to wait to sell your existing home. Benefits of this type of loan is you can start searching for your new home with confidence, even if you haven’t settled on your existing property. Typically you can choose between principal and interest, or interest-only repayments and once your property has sold you can use the proceeds from the sale to reduce the balance on your bridging loan following settlement. You may also be able to make unlimited lump sum payments, depending on the terms of your finance (restrictions often apply to Fixed Rate home loans).

Many of these loans do not have the same features or flexibility as other variable loans and will not typically have an offset account. This loan type can also present certain risks, the greatest risk being that your property does not sell within the bridging period which may see an increase in the interest rate charged. Taking a secondary debt on top of an existing mortgage means that you will have an additional interest rate cost.

Combining the security of a fixed rate home loan and the benefits of a variable loan, the Split Loan option allows you the freedom to choose how much money you assign to each loan type.  Common split loan ratios are 50:50, 70:30 or 60:40 over a two-way fixed and variable rate.

The key consideration generally comes down to the amount of risk you want to take on the cash rate going up or down. Typical benefits are the competitive interest rates over a variety of fixed and variable loan types whilst having the Flexibility – you can choose which portion you would like to fix and which portion you would like to be on variable terms suited to your needs. The Fixed rate portion offers rate and repayment security and peace of mind whilst the variable rate gives you repayment flexibility and the added benefit of an offset account. Split loans are very popular and ideal for property investors. Borrowers keep their owner-occupier loan on a variable rate, while the investment property loan is set on fixed terms, a popular strategy used by property investors to assist with the management of cash flow for the loan/property investment.

Introductory or Honeymoon loans are generally popular for first home buyers, however this doesn’t mean that these are the only people who can access these products. Honeymoon loans give individuals a discounted interest rate for the first six to twelve months depending on the product. After this period expires, the loan generally reverts to the lenders standard variable product.

Although it may be tempting to take out a Honeymoon loan because of its reduced interest rate, it is important to watch out for restrictions or exclusions on other aspects of the loan. Many lenders will limit the availability of features (such as redraw facilities, repayments etc.) to offset the lower interest rate. In some cases this can mean less flexibility over the life of the loan.

This type of loan is typically for those people who either own or are purchasing land for the purpose of constructing a dwelling, or have purchased a house and land package. With construction loans your builder will be paid in stages during the construction process and your loan balance will increase accordingly.

Low Doc loans are increasingly popular in Australia, especially for self employed or contractors. As the name suggests you require less documentation to take out the loan (this is essentially proof of income and other debts etc). Although it is generally much easier to be found eligible for these loans, it is not always the best way to go. As a result of providing less documentation the bank will generally charge a higher interest rate or additional fees because there is a higher perceived risk with applicants.  If possible, in most cases you will be better off with a full doc loan (full documentation – providing the required proof of income etc) because they are a cheaper product in the long run. Although it may be less work to apply for a low doc option, the extra work can be worthwhile applying for a full doc loan. Proof of serviceability will still be sort by Lenders offering LOW DOC, however they will except alternative proof of income, as an example 6-12 months trading statements, 6-12 Months BAS statements, accountants declaration and so on.

What is a 100% offset home loan?

A 100% offset account for a home loan is a simple feature that enables you to pay off your loan sooner without even thinking about it. An offset account is a regular cheque account that has ATM, cheque book and internet access that is linked to your home loan when your loan is setup. Instead of earning interest on the money in your offset account, instead you save interest on your home loan!

This is beneficial because generally the interest rate on a savings account is far lower than the interest the bank is charging you on your home loan. With an offset account they will charge you interest on the balance of your home loan less the balance of your offset account.

Example offset calculation

If you had a home loan of $500,000 and you had an offset account with $100,000 in it then the bank would only charge you interest as if you owed them $400,000.

So how does this compare to putting your money in a savings account? If your home loan was at an interest rate of 5% p.a. and the savings accounts with the banks were at 3.5% p.a. then instead of earning $3,500 p.a. on your $100,000, by putting it in an offset account you would save $5,000 in interest.

Not just are you $1,500 ahead in this example, if you consider that the ATO would tax you on the $3,500 interest you earn from the savings account you actually end up even further ahead by choosing an offset account instead.

That is one of the most frequently asked questions and something that needs to be carefully considered before jumping in and signing loan documents. Really, it comes down to what you think is right for you. Speaking to a broker is a really great way to find out what loan is most appropriate for you.

A broker won’t force you to take out a product; they recommend a loan that will suit you based on the information you have given them and take care of all of the paperwork and application requirements. If you specifically would like a certain type of loan a broker is able to compare a wide range of them.

There are many different types of home loan products on the market. Not surprisingly there isn’t a one size fits all product and before speaking to your Property In Demand Financial broker it is generally a good idea to have a basic understanding of the main types.