Types of Home Loans-
Fixed or Variable Home Loans ?

Types Of Loan

There are a variety of home loans types, each offering different rates and features.

A loan can usually be tailored to suit individual requirements. Lenders will advise on the types of loan they have available. With many packages on offer, it can often be difficult to work out the differences, benefits and disadvantages. Make sure you understand these before signing an agreement.

You should try to obtain as much information as possible and ask lenders to explain terms and conditions of loan packages in writing. Most lenders have software (Loan Simulators ) that can create a model of a loan, according to variables such as the amount and duration of the loan, and the frequency of repayments (weekly, fortnightly or monthly). By entering these details into the software, the lender can show you a graph of how much will be paid off the loan each year.

Repayment options and switching costs should be taken into account when choosing a loan.

• A flexible repayment option may be beneficial if you are planning to start a family. A basic loan with less flexibility may not allow you to vary your repayments.

• Substantial costs may be incurred for ending or switching from certain loans.

Quick Tip:

The two basic home loans are:

• Variable loans, and
• Fixed Loans

Variable Loans

Variable rate loans, where the interest rate can vary during the life of the loan, are the most common type of home loan available. The lender will adjust the rate, according to the economic climate and the official interest rate set by the Reserve Bank. Competition among other lenders may also affect the rate. While a fluctuation of one percent may not sound like a lot, it can translate to as much as $170 a month on a $200,000 loan.

Most Lenders will offer several types of variable loans, with different rates and added extras. Generally, the loans with the lower interest rates have less flexibility in terms of conditions and fewer or no added extras.

Those with higher rates may offer extras such as redraw facility, which allows you to draw on money already paid into the loan. They will also have more flexibility conditions such as no restrictions on making extra payments or paying off the loan early.

Fixed Loans

These loans are set at a fixed rate for a certain period – generally, anywhere between one and five years. This type of loan allows you to organise your finances and repayments without having to worry about fluctuating interest rates. You will, however, take the chance of not benefiting from drop in current interest rates. Penalties usually apply for breaking the loan contact or paying off the loan before the end of the fixed period. Most fixed loans have a restriction on extra repayments and limited extra features.

Always check the conditions of your loan.

Split Loan

Many lenders will allow you the option of splitting a loan into a partly fixed rate and a partly variable rate; at whatever percentage the borrower chooses. For example, an 80% fixed rate with a 20% variable rate. This allows you to customise the loan so as to combine the security of the fixed loan with some of the flexibility of the variable rate.

Capped Rate Loans

These are loans with rates that cannot exceed an agreed percentage for a fixed period of time, but may decrease during the fixed period.

 

Honeymoon Loans

This type of loan has rates that are lower for the first six to twelve months. After this period the loan reverts to a standard variable rate and the repayments increase. Remember to look past the honeymoon period, be sure you have the capacity to meet the higher repayments and know what you face for the duration of the loan. Also be aware that at the end of the honeymoon period there may be `switch costs` depending upon the type of loan chosen.

Bridging Loans

Timing can be crucial issue when selling one property and buying another. Sometimes if the right property becomes available, it is not always possible to wait until the current one is sold or negotiate convenient settlement terms. A bridging loan can be used to cover the financial gap when buying one property before the existing one is sold. There is a certain time period, usually six to twelve months, in which existing property must be sold. A bridging loan can be secured by both the existing and new propertied. Bridging finance may be expensive than ordinary home loan finance.

 

Vendor Financing

Finance is supplied by the vendor, rather than by an established credit provider. This type of financing has been used for many years, particularly in the purchase of farm properties. (See page 18 – ‘wrapping’)

 

Other Considerations

 

Early Repayments

Making lump sum payments or higher loan repayments will help you pay off your loan sooner. It is also possible to shorten the term of the loan by making more frequent or extra payments. While the term (or repayment period) of many home loans is 25 years, the trend recently has been towards shortening the term, for example, to 15 years. Depending on the type of loan, there may be restricting on making unscheduled payments or increasing the number of repayments.

Interest Rate Rises

In calculating the size of the loan and repayments, the borrower should include a margin to allow for potential rises in interest rates. In the last two decades rates have been as low as five and as high as seventeen percent.

 

Mortgage Offset

Mortgage offset allows interest on savings held by a borrower to be credited against interest charges on the mortgage. This in turn helps reduce the term of the loan by dedicating more of your regular payments to replaying the amount owing instead of interest. Carefully check all terms and conditions.

 

First Home Owner Grant

The first Home Owners Grant Scheme provides eligible first Home Owners with a non-means tested, one-off payment of $7000 (as of 1st July 2000). This is regardless of the purchase of an existing home or to build a new home.

Your lender, solicitor or conveyancer may arrange the First Home Owners Grant application for you.
 

Whatever it is, I can discuss how your home loan can work for you.

Call me directly on 1300 780 050

Sarah Reman

Team leader - Dreamloans Homeloans

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