When you’re ready to shop for a new home, whether it is your first home or relocation, there are several different types of mortgages for which you can apply. The type of mortgage that you select will depend on many factors, including the current interest rates and your credit history. Here are some of the home loan options you have when you’re in the market for a house.
Fixed Rate Loans
When you have a fixed rate mortgage, the interest rate is locked in for up to 10 years. This helps protect you against a rise in interest rates, but if interest rates are falling, you could be locked into a higher rate. In order to get a better interest rate, you would have to refinance the loan.
With this loan, you are limited to the number of extra repayments you can make. Most lenders will limit you to $10,000 in extra repayments. Once the fixed rate mortgage has reached the end of its term, it usually reverts to a standard variable rate mortgage.
Basic Variable Rate Loans
This type of loan offers a lower interest rate than most standard variable rate loans. It is a basic loan with an interest rate that fluctuates as the Reserve Bank’s interest rate changes. Most of these mortgages have 25 to 30 year terms and most of them allow for extra repayments to be made on the loan in order to get it paid off quicker.
Standard Variable Rate Loans
This is the most common type of mortgage taken out in Australia. Like the basic variable rate loan, the interest rate fluctuates and will cause your loan repayments to rise or fall. It is a more flexible mortgage than the basic variable rate home loan and it allows for as many extra repayments as you would like to make. This loan usually has terms of 25 to 30 years.
The main disadvantage of a variable rate loan is that your repayments could increase if interest rates go up. This is a great loan to have when interest rates are falling as your payments will decrease. When payments decrease, you can put more money toward loan repayments to pay off your mortgage quicker.
A split loan allows you to split your mortgage into two parts. One part will be a fixed rate loan and the other will be a variable rate loan. If interest rates are low, you can take advantage of them by having part of the loan at a fixed rate, locking in lower monthly repayments. However, the other half of the loan will be at a variable rate, which fluctuates as interest rates do.
The advantage to a split loan is that it allows extra repayments and you can take advantage of other loan features, such as redraw facilities or offset accounts. You can assign the amount of money per loan type and the ratios for these loans are usually split 50:50, 60:40 or 70:30.
Introductory Rate Loans
Also known as honeymoon rate loans, they are low interest short term loans, generally with a 12-month term. Once the term has ended, the loan reverts to a standard variable interest rate loan. While the rate is low, you can make extra repayments to reduce the loan principal. An offset facility can be used with these types of loans. One disadvantage to this type of loan is that most banks will charge penalties if these loans are discharged in three to four years.
Low Doc Loans
If you don’t have the documentation needed to verify your income, it can be difficult to secure a home loan. However, with a low doc loan, you may be able to get a mortgage to buy a house. Usually the people who qualify for these loans are self-employed or have an irregular income, they have trouble separating personal and business cash flow and they may not have current financial records
Home Loan Terminology
Along with these loan types, there are some terms that you need to become familiar with as they are products associated with home loans.
This is a transaction account that is linked to your mortgage. These accounts allow you to use your income and other monies on the interest you owe on your mortgage. The daily credit balance is offset against the outstanding loan balance, which is what reduces the interest on the loan.
The offset account works much like a regular savings account and you have may have access to the funds through an ATM card or a cheque book. An offset account is usually available with standard variable rate loans and introductory rate loans.
When you make extra repayments on your mortgage, you have the ability to get those payments back if you have a redraw facility. The benefit of making the extra repayments, which is to reduce your mortgage quickly, will be lost. You should be aware that there are fees for having a redraw facility and a fee for withdrawing funds from it.
You may be limited to the number of free redraws that you have per year and there is usually a limit to the total redraws you can have each year. There is also a minimum and maximum amount that you can redraw from the account. The maximum amount is usually equal to the total of extra repayments that have been made.
If you are trying to buy a home, you may be able to use a family guarantee to help secure the property. This guarantee is one in which a family member offers security, usually their own home, for the amount you need to borrow. With a family guarantee, you may not need to put down a deposit and you may not need to pay Lender’s Mortgage Insurance.
Being aware of the home loan types available to you and mortgage terms you will come across will help you be smarter about taking out a mortgage and knowing what to expect when you do.