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Home loan options

There are so many different home loan structures available, so how do you know which one is right for you?

Making yourself familiar with a few of the popular products available will give you a strong head start when discussing your loan options. Here are just a few of the product types you’re sure to come across.

Basic home loans

Basic home loans or ‘no frills’ loans offer borrowers a loan with a low interest rate.

This interest and principal repayment loan is a popular choice among first home buyers. A basic home loan’s interest rate can be half to one per cent below the standard variable rate, which is sometimes combined with minimal ongoing fees. Potential drawbacks can include limited features, less flexibility, and additional charges if you decide to switch loans or pay the loan off sooner.

PROS

Interest rates are often half to one per cent below the standard variable rate.

CONS

Limited features, less flexibility and possible penalty fees for early loan repayment.

Fixed-rate home loans

Worried about rising interest rates? A fixed-rate home loan will allow you to fix your interest rate for a specific period, usually from one to five years. It can be a sound option when interest rates are on the rise, or in times of economic uncertainty. Should interest rates plummet, however, you’ll still have to pay off your mortgage at the fixed-rate until the end of the agreed fixed-rate period. Additionally, keep in mind that you may be charged a fee commonly called a break cost or economic cost, should you decide to break your fixed term or switch to another product. You may also be limited in making extra repayments.

PROS

Fix your interest rate for a specific period, giving certainty to regular repayment amounts.

CONS

Should interest rates fall you’ll still need to repay your mortgage at the agreed fixed-rate. There are potentially also high loan break costs payable of you, if you wish to end the fixed-rate term early. Ending the fixed-rate term early includes repaying the loan early and if you switch from one loan to another before the fixed-rate term expires. Fixed-rate loans may also limit additional repayments that can be made during the fixed-rate term.

Standard variable-rate home loans

A popular mainstream choice, standard variable-rate interest and principal home loans allow you to borrow money for a set period of time, during which you make regular repayments. The interest rate can vary depending on fluctuations in the official cash rate, so it is likely to go up or down depending on the market cycle.

PROS

Make regular repayments based on the current interest rate. Effective if rates do not rise.

CONS

Should interest rates increase, your regular mortgage repayments will rise.

Split-rate home loans

Want the best of both worlds? A split-rate home loan offers both flexibility and security. A good product for both first time and existing borrowers, split loans allow you to customise your loan’s interest rate as you see fit: fixing a portion of your interest rate to give certainty to your monthly repayments during the fixed-rate term should rates increase, but also flexibility through taking out a variable-rate portion.

PROS

Fix a portion of your interest rate to give certainty to monthly repayments while also benefit from a variable-rate portion should rates drop.

CONS

If interest rates do drop you’ll be left paying a higher rate for your fixed-rate portion. If you break the fixed-rate period early you may be subject to break costs and you may be limited to extra repayments on the loan.

Interest-only home loans

Interest-only loans offer borrowers lower repayment options, while maintaining many of a traditional loan’s features. This type of loan allows you to pay only the interest component on a mortgage; it does not reduce the principal component. They are a popular choice for investors seeking good capital appreciation on their investments.

PROS

Pay only the interest component on your mortgage for a set term. An ideal option for borrowers with an investment property.

CONS

Repayments do not reduce the principal component of your mortgage.

Low-doc home loans

If you’re self-employed, a contractor or a seasonal worker and do not have a regular income, a low-doc loan may be a solution.

PROS

Can help you enter the property market if you’re a self-employed, contract or seasonal worker without regular income or proof of income.

CONS

Typically have higher interest rates. You may also have to pay Lenders Mortgage Insurance (LMI).

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