Basic Home Loan
A basic home loan account, as it sounds, offers borrowers a low interest rate home loan with few or no regular fees - a “no-frills” loan, which usually carries no additional features. Be aware it also usually doesn't have any flexibility in paying extra off the loan or varying repayments.
This loan is ideal for people who don't foresee a dramatic change in their personal circumstances and therefore don't need to have flexibility with their home loan, or who may not have the means to repay any more than the minimum home loan repayment.
Fixed Rate Loan
This type of loan has a fixed interest rate for a certain period of time, most often between 2 and 5 years. Once the fixed rate period ends, customers may be offered another fixed rate period or the rate will convert to a variable interest rate, which can rise and fall.
Basic & Standard Variable Home Loans
If a loan has a variable interest rate, that means its rate will fluctuate during the loan term. When the Reserve Bank of Australia lowers or raises the official cash rate, the interest rate on a variable home loan will change accordingly. Standard variable home loans usually offer more features than the basic variable home loan, such as being able to make extra payments or being able to redraw the money deposited.
Fully Flexible Home Loans
This loan works in a similar way to a basic home loan but, depending on the loan products, will allow the borrower to make additional repayments whenever possible, pay their salary directly into their loan account or discharge the home loan at any time without penalty.
Introductory or ‘Honeymoon' Rate Loans
Virtually every bank in the marketplace now offers borrowers a loan with an introductory or “special honeymoon” rate. The introductory rate is usually a lower interest rate than the standard variable home loans and runs for a specific period of time, say six months or one year. Once the honeymoon is over, the interest rate on the loan will revert to either the standard variable home loan interest rate or sometimes even a higher interest rate.
These loans may be appropriate for people who want to minimise their initial repayments (whilst perhaps doing renovations) or to those who wish to make a large dent in their loan through extra repayments while benefiting from the lower rate of interest.
Be careful when choosing this loan that you can afford repayments at the higher post-honeymoon interest rate level. You need to weigh up how competitive a loan will be over its expected life. It doesn't matter how low a lender's interest rate is for the first 6-12 months if you then end up paying far more than necessary for the next 29 years!
Tip: If you start paying off this loan at the post-honeymoon rate, you will effectively be paying off extra and will not have to make a lifestyle change when the introductory offer has finished.
Interest Only Loan
This type of home loan allows borrowers to make payments in the form of interest only – that is, no payment is put toward the principal balance of the loan.
Interest only loans are offered by all major lenders and can generally be fixed for periods of one, three or five years. At the end of the term the principal is either refinanced for a further fixed term, reverts to a principal and interest basis, or is repaid. A part repayment with the balance refinanced is another option.
This loan may be a good choice for people who want to avoid any cash flow stress that a sharp rise in interest rates may cause. It is also a viable option for property investors, as only the interest on a loan is tax deductible, therefore if you have an interest-only loan, your repayment each month is tax deductible.
A Redraw Home Loan
Again, this is similar to an all in one home loan and a 100% off-set account, but the redraw loan is an account that allows you to put additional funds, such as salary or other savings, into the loan in order to bring down the principal amount and reduce interest charges. As the name suggests, you can redraw the extra money deposited at any time in the future as needed.
Simply put, rather than earning (taxable) interest from your savings, putting them into the loan saves money on interest charges and helps pay off the loan faster. However, you are still saving for the future.
The benefit of this type of loan is the interest charged is normally cheaper than the standard variable rate and it doesn't incur regular fees. Be aware there may be an activation fee to obtain a redraw facility, there may be a fee for each time you redraw, and it may have a minimum redraw amount.
These loans are suited to low to medium income earners who can put away that little extra each month.
Line of Credit
Line of Credit home loans allow you to borrow a pre-approved amount of money against the equity in your home, at an interest-only variable rate, either in its entirety or in bits at a time. This loan is popular because of its flexibility and ability to reduce mortgages quickly. However, the borrower usually has to offer the property as security for the loan. A line of credit can be set to a negotiated time (normally 1-5 years) or be classed as revolving (longer terms), and you only have to pay interest on the money used (or ‘drawn down').
Most of these loans have a monthly, half yearly or annual fee attached. Interest rates are variable and, due to the level of flexibility, are often higher than the standard variable rate.
These loans are suited to people who are financially responsible and already have property and wish to use their property or equity in their property for renovations, investments or personal use.
All in one Home Loans
This type of home loan allows you to combine your savings account, cheque account and home loan account in to one. This means all your income is deposited directly into the loan account and because interest on the loan account is charged daily (but billed monthly), the effect is that the amount on which interest is calculated is reduced. If you need money, simply withdraw it from the home loan account as you would a normal savings account.
Normally these loans will be at the standard variable rate or slightly higher and may incur monthly fees. Be aware that if the account is split into the loan account, with credit, cheque and ATM facilities placed into satellite accounts, you will need to check access to funds, how many free transactions are available and what associated fees the loan may have.
These loans are suited to medium to high income earners.
100% Offset Loan
The offset loan works in a similar way to an all in one loan in that it allows you to place all earnings and savings in one account. This effectively reduces the balance of interest payable on the home loan, although the offset account is actually a separate account linked to the home loan.
Whatever is in the Offset Account then comes directly off the loan, or ‘offsets' the loan amount for interest. So you are not earning interest on your savings, but are benefiting in that what would otherwise be interest on savings is calculated as a reduction on your loan. The advantages are similar to the All-In-One Account. These loans normally have a higher interest rate and higher fees due to their flexibility.
These loans are directed at medium-to-high income earners, and to disciplined spenders, as the more money kept in the offset account the faster you pay off your loan.
Partial offset account and an interest offset account are also available.
Split Loan
The Split Loan combines different loan types into one home loan, where the amount borrowed is split into different segments, with each part having a different loan structure i.e. part fixed, part varied and part line of credit. These loans are directed at people who seek to minimise risk and hedge their bets against interest rate changes while maintaining flexibility; however, the way the splits are structured may give rise to taxation issues in some circumstances.
“Low Doc” Loans
“Low-doc” or low documentation loans are structured for the self-employed who have income and assets but don't have the documentation (financial statements, tax returns etc) required to obtain traditional home loans. The interest rate is often higher than the standard variable rate although the gap is narrowing. These loans generally carry a requirement for mortgage insurance, adding to their cost.
These are just some of the home loan products now available. Before deciding which one is right for you, make sure you think carefully about your employment situation now and what it's likely to be in the future, as well as any special features that could be included in the loan. Once that is sorted, talk to a mortgage broker or shop around until you find the best deal.