Let’s look at all the different loans
Loans are many and varied and they all offer different structures, rates, and benefits for different situations. Get to know them all, and you’ll better understand your best options, and be able to work with a broker on your final choice.
The two stages where you’re most likely to encounter the most jargon will be with your mortgage broker, and around home loans in general. All of this new, and often technical financial language can be frustrating and hard to understand at first. Of course, a good broker will translate this new language and help you understand what you need to understand.
There’s no doubt about it, financial jargon can be confusing and hard to understand at first. It’s not a nice feeling if you don’t have a clear understanding of the financial part of your new home. A good quality broker will be patient and able to explain your loan in plain english.
This guide to home loan types and some common terms around this area will help you get a head start and be better prepared when you see your broker.
Fixed interest rate
A fixed interest rate is one that stays the same for the agreed term of your loan. It’s as simple as that. They offer certainty and consistency in terms of repayments and amounts and are great options for first home buyers and people with strict or restricted budgets. With a fixed rate loan, you often sacrifice flexibility for certainty.
Variable interest rate
Variable rate loans do give you flexibility on interest rates, and therefore your repayment amounts rise and fall in line with the Reserve Bank. Variable rate loans are often the most popular because of the flexibility they offer.
Split rate loan
This is the loan that includes both fixed and variable rates. With a split rate loan, part of your home loan is at a fixed rate of interest, to give you some certainty, while the remaining amount will be variable to give the advantage of flexible loan features like an offset account.
Construction home loan
This is a loan specifically for building a new home or doing a major renovation. It is structured differently to a standard mortgage. First, the lender looks at the total loan amount needed. Then, the money for the land purchase can be borrowed, and the client (that’s you) has to agree to start building the new home within a specified time frame. The rest of the loan amount is then distributed in stages, as the build progresses. Most construction loans will only require repayments on the amount lended, not the total and this can offer good opportunities to save.
Interest only loan
Most loans require the repayment of the principal amount, plus the interest on the loan. With an interest only loan, like the name says, you will only need to repay the interest, for the agreed time, usually 1 to 5 years. Interest only loans are great for investors, who are relying on the property increasing in value. Interest only can also be a good option for some first home buyers who need to minimise their repayments at the start.
Extra repayments facility
When you repay only the minimum required amounts, it will take longer to pay off the mortgage, and you’ll pay more interest because of that. It’s a great idea to pay back a little extra whenever you can and some loans allow you to do this.
Low doc loan
Low doc loans are for sole traders and business owners. They allow them to apply for the loan with less documentation. While this makes it generally easier to apply and gain approval, low doc loans usually come with higher fees and interest rates.
Home loan top up
When you have built equity in your home, many lenders let you to draw on that equity to borrow more. This extra borrowing is called a ‘top up’ and can be handy for all sorts of large purchases like a car, a family holiday or renovations.