Business & Finance Renting & Real Estate

Home Loan Types

Quite literally, there are several different home loan types on the market.
Each one offers different features, costs, and benefits.
If you are a first time home loan borrower, the mind-boggling range of home loans can leave you overawed and confused.
So here's a snapshot of the different home loan types along with their pros and cons.
Basic or "no frills" loans: A basic home loan has a variable and relatively low interest rate but has no special features or benefits that add to the overall cost.
Pros: lower interest rate means short loan repayment term.
If the interest rates fall, your minimum repayment amount will fall as well.
Cons: are not flexible and don't have many features like other loans.
You must check for the provision to make additional repayments so that you can pay off the loan early.
Remember, if interest rates rise, your repayments will rise too, so ensure you can mange to pay the loan in this situation as well.
Who it suits: Perfect for first home buyers.
Standard variable rate loans: A popular home loan type in Australia, this loan is offered by most lenders.
Again a variable interest rate loan, it offers some more features and flexibility than basic loan but the interest rate is more as well.
Pros: Lower rates mean lower repayments but you must continue paying at the old level to get rid of the debt at the earliest.
Some features include redraw; the choice between variable for fixed rate, making extra loan payments without attracting penalty and portability.
Cons: higher interest rates translate into higher loan repayments.
Who it suits: just about anyone from home buyers to people refinancing and those who want flexibility with their repayments.
Fixed-rate loans: The rate of interest is fixed for a period of one to five years so you know what your monthly repayment amount is going to be for that specific period.
Once this term ends, you can fix another fixed rate or choose variable or split interest.
Pros: you know the exact amount of your repayments and can budget accordingly.
Cons: You over pay if interest rates fall.
These loans only have a few features and aren't as flexible as variable loans.
You must check about penalties or exit fees as well as if you can make additional repayments.
Who it suits: most suitable for borrowers who want a fixed monthly repayment amount or those who get nightmares about rising interest rates.
Equity line of credit loans: Equity line loans allow you to use your home's equity to arrange funds for renovations or investment in other financial instruments such as funds or stocks.
You require having a good equity on the home or having a big deposit to get this loan.
Pros: with no fixed repayments, you can get extra cash when needed without the headache of applying for a new loan.
Cons: more expensive than other standard loans, so only opt for it if it is really necessary.
Lack of timely payments could mean only interest payments and lower savings.
In the worst cases, you may be stuck with mortgage for ever! Who it suits: only for those with strong discipline & budgeting skills.

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