Finding the most suitable home loan that meets your needs can be difficult. Each type of home loan has different parameters that may appeal to different types of borrowers. Borrowers typically fall into three main categories that will help determine the most suitable loan product. These categories are first home buyers, people looking to buy or upgrade, and borrowers looking to refinance. Variable interest rate products are available for buyers who want flexibility and want to take advantage of an economic environment of low interest rates while fixed rate loans are for borrowers who want certainty in regards to the interest rate they are paying.
Types of Loans
Interest Only Loans
Interest only home loans are popular for investors and investment purposes. They have smaller repayments, as you don't have to pay back any of the capital, only the interest. The problem with interest only loans to the average home buyer is at the end of the loan period, you still have the principle to repay.
Principal and Interest Loans
In this type of loan, you pay back the capital and the interest as you go, so you are increasing your equity in the property. In this way you will own the property outright at the end of the loan, so it is the best option if you are buying a house in order to make it into a home.
Variable Rate Loans
Variable rate loans allow the lender to change the rate of interest in terms of the official interest rates set by the Reserve Bank of Australia.
Fixed Rate Loans (Break costs may apply)
Alternatively, you can take out a fixed rate loan, where the interest rate is fixed for a certain period. In this case you know exactly what the repayments will be, so you can determine if your budget will be able to cope. However, if there is a drop in interest rates, you could end up paying much more than you would have if you'd chosen a variable loan. They are popular because they are useful for budgeting, as one of your largest monthly expenses will not change for the period of the deal. They are also useful if rates look likely to rise in the coming months.
Split Rate Loans
Splitting your home loan into fixed and variable rate portions can provide insurance against future changes in interest rates that we can't predict If you are uncertain about the future direction of interest rates, you can ‘lock-in’ repayments on part of the loan by selecting a fixed rate and enjoy the potential for lower rates by keeping part of the loan on a variable rate.
