One of the most crucial decisions of life is buying a home. There are plenty of options through which one can buy a home. There are plenty of home loans that can support your journey of purchasing the home of your dreams. Although many things depend on your financial condition, the different types of loans available for Australians can accommodate the needs accordingly.
Home loans can always be a great option if you’re opting for a term payment. This means that if you want to have a mortgage bill set up for you, you’ll have the option to do so.
The different types of home loans are, and their brief is stated as below:
- Bridging loan: if you’re in a transition phase of selling your home and getting a new home with the money gained from it, bridging loan may be the right option for you. The bridging loan generally gives up to 6 months for selling your property; hence it’s a short term loan.
With bridging loans, a lender breaks the mortgage for your property and does other jobs such as creating the new property’s financial purchase. The amount borrowed for this entire transaction is called peak debt. Peak debt contains loans on your properties as well the price of the new property. Fees such as legal and stamp duty also come with the contract service.
The rule of bridging loan is until and unless the existing property is sold, the loan will be calculated based on calculated interest.
- Fixed vs Variable home loan: A fixed home loan allows one to lock the interest rate for a specific period. Any adjustments that one wants to make on their loans cannot be made through a lender. The duration of this particular loan is about 25-30 years. On the other hand, variable homes are a more flexible option. Variable loans offer multiple options starting from repayment to redraw facilities. Unlike fixed-rate home loans with a fixed repayment amount over the years, variable rates are much more doable.
The loan rates on fixed home loan interest are entirely predictable. The lenders who are in charge of the home loan analyze the cost of holding money for a specific period at an individual rate. One of the advantages of fixed home loans is not having to repay if the official interest rate rises. However, for fixed home loans, one still needs to follow the term payment because early payout causes a penalty.
The loan rate for variable home loans is pretty simple. The interest rate of variable home loans fluctuates according to the cash rate of the reserve bank of Australia.
- Interest-only home loans: Interest-only home loans have a plan of 5 years. This loan allows you to pay just in interest or both the interest and principal. However, to be qualified for an interest-only loan, the bank will determine the ability to afford the principal and the interest loan. If one chooses to pay just the interest, the principal amount can be paid at a very low rate. The flexibility of this specific loan is, you’re only paying the interest within the interest period, and you do not have to worry about principal repayment for the time being. Interest-only loans help you to invest in any renovation plans you might have. One of the core reasons why many go for interest-only home loans is that it cuts the cost of purchasing a residential property for a short time. This makes it easy for one to contribute to the primary residence. However, there are also downsides to it. The sudden increase of the repayment at the end of the interest period can come off as a burden.
- Construction loan: This specialized loan helps one to meet many ongoing needs with regard to mortgage repayments. Construction loans are not typical loans where you’ll be able to make payments in a lump sum. A construction loan allows a borrower to draw on the loan. Generally, the payments are made on the building process and hence are very flexible. However, for construction home loans, interest has to be paid on money that is being used. Since the payment procedure for construction loans is progress, the repayments are small at the initial stage but gradually grow as the project approaches completion.
If you’re looking for renovating your home, a construction loan plan may be suitable for your needs.
- Introductory home loans: Introductory home loans are very low in interest rate. This rate has also been termed as the honeymoon rate as it lasts for 12 months before rising. So what are the pros and cons of such loan? With an introductory loan, you will significantly reduce principal, and the reductions can be made through increased instalment.
- Low doc loan: Low doc loans are designed for borrowers who may find it challenging to work with paperwork for gaining access to a traditional loan. Investors and lenders mostly take up a low doc loan. With a low doc loan, one would have a simple declaration form of income and tax returns as evidence of income. The loan options offered by loan docs are very serviceable and have variable or fixed rates. However, some drawbacks come with such a loan. Banks or lenders do not ever provide low doc loans because of the lack of paperwork. Since the features are pretty less in low doc, it also comes with a higher interest rate.
- Non-conforming loan: People with lower credit rating can choose to resort to non-conforming home loans. Since low credit effects of taking up a traditional loan, non-conforming loans generally do the job of creating other areas to portray your ability to purchase a lender loan. With a non-conforming loan, one has to make a large deposit as a sign of being able to repay the taken loan. Many people also struggle with traditional home loans if they tend to change jobs, with non-conforming home loan regularly, you do not have to worry about your history on changing careers. It also allows you to access a lower interest rate.
Home loans can often come off as a burden to many. However, knowing one’s financial stance can help one to choose the right kind of home loan for their future.