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Understanding the different types of home loans available in Australia: Which one is right for you?

Mar 27, 2023 | Finance, News and Updates, Property Investing, Purchasing Property

Are you looking to make your dream of owning a home come true? Whether you’re a first-time homebuyer or an experienced investor, understanding the different types of home loans available in Australia is key to ensuring that you select the best option for your financial needs. From fixed and variable rate loans to construction and offset sub-accounts, there are a variety of loan options that can help you finance your dream home. In this article, we’ll provide an overview of each type of loan and discuss their respective pros and cons. So if you’re ready to get started, let’s dive right into it!

Ultimately, selecting the right type of home loan will depend on your individual circumstances and financial needs. It’s important to discuss all your options with a qualified professional who can provide tailored advice based on your situation and help you identify the best product for your needs.

What is an owner occupier loan?

An owner occupier loan is a type of home loan designed for people who are buying or constructing a property to live in as their primary residence. These loans typically offer lower interest rates than investment loans, which are designed for buyers who plan to rent out the property. With an owner occupier loan, you can borrow up to 95% of the purchase price and enjoy features such as extra repayments, redraw facilities and split loans. They also come with various payment options, including principal and interest or interest-only payments. For those looking to buy their first home, there may be government incentives available too, so it’s worth checking with your broker to see if you’re eligible.

What is an investment loan?

An investment loan is a type of home loan that is specifically designed for those who are looking to purchase an investment property.  Investment loans have higher interest rates than owner occupier loans, as well as stricter lending criteria and increased risk for lenders. They allow the expected rental income from tenants to be taken into account when working out if you can afford the loan or not.

What is a fixed home loan?

A fixed home loan is a loan product where the interest rate and repayments are locked in for a pre-determined period of time, usually one to five years. This means that you can budget with certainty, as your repayment amount will stay the same throughout the loan term, regardless of any changes to the cash rate or other economic factors.

Fixed rate loans can be beneficial if you’re looking for stability and predictability when it comes to your loan repayments. They also provide protection against potential rate increases, so if interest rates go up during your loan term, you won’t see an increase in your repayments.

On the other hand, while fixed-rate loans offer greater peace of mind, they usually come with fewer features than variable loans – such as limited extra repayments and no redraw facility.

What is a variable home loan?

A variable home loan is one of the most common types of loan products available in Australia. It allows you to take advantage of changing interest rates, which can be both a benefit and a risk. With a variable rate loan, your interest rate will fluctuate depending on the cash rate set by the Reserve Bank of Australia – meaning you may pay more or less each month.

One key benefit of a variable home loan is that it usually offers features such as additional repayments and redraw/offset facility, allowing you to make extra payments or withdraw funds if necessary. However, it’s important to remember that when the cash rate increases, so does the amount you’ll need to pay off your loan – so budgeting for higher than normal repayments is essential.

What is a split loan?

A split loan is a type of home loan that allows you to divide your loan between two different types of rates – fixed and variable. This gives you the flexibility to take advantage of potential savings with a variable rate while also giving you some stability with a fixed rate. With this type of loan, you can choose which portion will be set at a fixed rate and which portion will remain at a variable rate, or you can have multiple different loan splits. 

Split loans are becoming increasingly popular in Australia as people look for ways to benefit from both types of rates without having to commit solely to one or the other. They’re also great for first-time buyers who may not feel comfortable locking themselves into one type of rate for an extended period of time. So, if you’re looking for greater flexibility with your home loan, a split loan could be worth considering.

What is a construction loan?

A construction loan is a type of loan specifically designed to finance the cost of building a new property or making major renovations to an existing property. They require more paperwork and have more stringent approval requirements than regular loans, so make sure you’re prepared for this before applying! Furthermore, if construction is delayed or there are any unexpected costs along the way, these could end up eating into your budget significantly.

With a construction loan, the lender will disburse funds in stages as milestones are achieved during the building process. At the end of this process, when the property is completed, you’ll be able to convert this to a regular loan.

What is a line of credit?

A line of credit is a type of loan that allows you to borrow up to a certain preset limit and then repay it when you feel like it. It’s different from other loans in that it generally doesn’t have a fixed repayment schedule – instead, you can borrow as much or as little as you need, when you need it. They are like a big credit card but have become very much out of favour with lenders and are now not offered by many.

The main benefit of a line of credit is that you only pay interest on the amount of money you actually use, rather than all the money approved. This means that, if your circumstances change and you don’t end up needing to use all your approved funds, you won’t be charged any extra fees! You also have flexibility when it comes to repaying the loan – while there are sometime minimum payments required each month, you can also make additional repayments whenever you want.

There are many types of home loans available in Australia, with each type offering different benefits and drawbacks. It is important to do your research and understand the different types of loans on offer so that you can make an informed decision about which one is right for you. Consider the loan term, interest rate, repayment options, fees, and any other factors that may come into play when making your choice. Ultimately, having a mortgage broker like myself to help you navigate these options will make it less daunting.

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