Not all home loans are created equal, and all home loans will have pros and cons, so the trick is to find the one that suits you best.
Finding the right home loan that suits your personal situation, budget, and requirements is important, and here we’ve outlined some important points to help on your quest for the right type of home loan for you.
Basic Home Loan
As the name suggests, a basic home loan is a “no frills” loan with basic features, and often around half a percent lower than a standard variable loan.
This type of loan generally comes as is without offset accounts, cheque books, credit cards, or savings accounts. A redraw fee is usually charged to withdraw additional funds you have put into the loan, and a minimum redraw amount usually applies.
Standard Variable Loan
The main feature of a standard variable loan is that its interest rate alters in line with financial markets.
This type of loan often features an array of benefits, including a discounted introductory rate and redraw facility to withdraw additional funds you have paid into the loan, if required.
You may find some diversity in the standard variable loans amongst lenders, so research is key.
Fixed Interest Loan
Most lenders offer fixed interest loans, which in contrast to the standard variable loan, offer an interest rate that is fixed.
A fixed interest loan is worth considering for peace of mind to ensure your interest rate will always remain stable and enable you to calculate and manage your loan more easily. On the other hand, a fixed interest loan doesn’t benefit from possible decreases in interest rates, so may at times attract a higher interest rate.
Many fixed interest loans also don’t enable additional repayments to be made or to redraw on your loan.
Low document (low-doc) loans are offered by many banks and other lenders.
A Low-Doc loan may suit you if it’s difficult to provide conventional documentation, such as proof of income and tax returns.
Rather than provide the required traditional paperwork, when applying for a low-doc loan you will usually be required to:
- Sign a declaration confirming you are able to afford the loan
- Supply an ABN or confirmation letter from an Accountant if self-employed
- Have a proven satisfactory repayment record and credit history.
- A building contract set at a fixed price, signed by a licensed builder
- Council approved plans.
- Borrowing amount is less than $250,000
- No personal borrowings
- One security property only
- Don’t intend to change your loan structure
- Don’t have a credit card.
If it’s difficult for you to prove your income due to being self-employed, re-investing profits, writing off expenses, or other reasons, a flexible low-doc loan may be just what you need for a successful home loan application.
Due to the differing nature of low-doc loans, fees and interest rates are usually higher and borrowers are also required to pay lender’s mortgage insurance, which ensures the lender is protected if the borrower defaults on the loan.
If you are able to provide the required documentation down the track, your lender will usually agree to switch your home loan from a low-doc one to a more conventional home loan.
A non-conforming loan also surrenders the necessity to provide traditional proof of income documentation, however, contrary to a low-doc loan, which requires mortgage insurance and a clear credit history, a non-conforming loan is more likely to apply in circumstances such as bad credit history or unable to prove or confirm a satisfactory income.
Non-conforming loans are likely to encounter a higher interest rate and surpass 80% of the value of the security.
Introductory / Honeymoon Loans
These popular loans are often appealing to first home buyers, where a lower interest rate is applied for an initial period of anywhere between six months and four years. These loans are usually not available to borrowers who already have a loan with the particular lender.
Introductory loans will usually return to the standard variable rate once the honeymoon period is over, and some lenders may not allow you to pay extra on your loan during this period. If this is not the case, making higher repayments above the cheaper introductory rate is a great way to build equity and create a habit of paying the amount your loan will eventually revert to.
If you’re considering signing up for this type of loan, ensure you do your research to prevent being charged with a hefty penalty at the conclusion of the honeymoon period. Keep in mind also that while a tempting introductory rate may last for two years or so, the entirety of your loan may be 30 years. If the loan does last for the entire term you require, a cheaper honeymoon rate may just be an added bonus.
Construction loans differ to regular loans and may be suitable if you are building rather than buying an existing property. A construction loan may also be suitable if you’re undertaking major renovations on a property.
A construction loan will usually entail the lender considering the total borrowing amount and breaking this down into independent payments as required in the building process.
A construction loan may help you save interest, as you will usually only pay the interest on the separate amounts initially. As payment is only made to the builder in stages, you are able to inspect the work being undertaken while in progress.
To apply for a construction loan you will need to supply:
These types of loans were traditionally offered as a special professional package (pro-pack) to professionals such as doctors and solicitors, although these days are generally offered to borrowers based on total borrowing amount.
A pro-pack loan may be suitable to consider if:
Sometimes referred to as discounted loans, a Pro-Pack loan often includes a discount to the standard variable rate, discounted insurance, offset and savings accounts, and fee waivers on certain features such as top-ups and valuations.
Benefits of a pro-pack loan may differ between lenders, and as well as offering rate discounts, other advantages may include fees being waivered or reduced.
While some lenders’ criteria for a Professional Package loan still includes belonging to a certain ‘profession,’ to most lenders your total loan amount determines eligibility.