Buying

Understanding the Types of Loans Available on the Market

Ultimate First Home Buyers Guide

Every person is different and it is important to find a mortgage that suits your needs and lifestyle. To find the right mortgage it is important to assess the types of loans available in the market.

Use the following table to help you compare the types of loans available to first home buyers.

 

Standard Variable Home Loan

This is one of the more popular types of loans for a first home buyer. With this mortgage the interest rate is not locked in and thus it moves up and down when interest rates change.

Advantages Disadvantages
1. If interest rates drop this means repayments might drop. 1. If interest rates rise, repayments will rise along with the amount of interest paid.
2. Pay off your home loan faster by making extra payments without incurring penalties. 2. Extra features mean you may pay a higher interest rate than a basic variable loan.
Basic Variable Home Loan

 

Basic variable home loans are sometimes referred to as ‘no frills’ loans. This type of loan is a good home loan to consider if you are not interested in added features but still want some flexibility with the interest rate.
Advantages Disadvantages
Lower interest rates than the standard variable loans. Not as flexible as standard variable home loans.
Repayments are generally lower than standard variable loans. Offer less features
If the Reserve Bank of Australia or one of the four banks drops interest rates this means repayments might drop. If interest rates rise repayments will increase

Fixed Rate Home Loan

Fixed rate home loans are popular for those people who like to know what they are paying each month. The interest rate for a fixed home loan can be fixed for anything between one and 10 years and it will remain the same for the duration of the loan regardless what happens to interest rates.

Advantages Disadvantages
Even if interest rates rise borrowers will continue to pay the same amount. If interest rates fall the borrowers repayments will not, they stay the same.
Fixed rate loans generally offer cheaper interest rates than flexible home loans. If you decide to sell your home during the fixed rate period and you want to pay off the loan in full the borrower can be stung with heavy fees.
Allows more precise budgeting.

 

Split Rate Home Loan

A split rate home loan is when you split your home loan so part of the loan is a variable rate home loan and the other half as a fixed rate home loan. This type of loan usually has a time frame.After the time frame has past the whole amount of the loan is converted into a variable rate loan unless you renegotiate to extend the split rate loan.

Advantages Disadvantages
When interest rates rise you can have the interest rate security of a fixed loan joined with the repayment flexibility of a variable rate loan. If interest rates rise, the repayments on the variable part of the loan will also increase.
Additional payments on a variable portion can be made. If interest rates drop, the repayment on the fixed rate portion of the loan will remain the higher fixed amount
Allows limited additional payments only.

Introductory Rate Home Loan

The introductory rate home loan or ‘honeymoon’ home loan offers first home buyers a lower interest in the first year of the loan.At the end of the first year the interest rate changes back to the standard variable rate.This loan allows for lower fees because it usually provides less features and extra payment rules to borrowers than other loans.

 

Advantages Disadvantages
What you save in repayments can help offset the costs of stamp duty, solicitors and moving. Most banks charge penalties if you decide to get out of the loan within the first 3-4 years after settlement.
When payments are made at the introductory rate, the principal can be reduced quickly. Payments increase after the introductory period.

No Deposit Home Loans

No deposit home loans offer borrowers a chance to borrow up to 100% of the purchase.However, there are very strict requirements and assessment criteria which can make approval very difficult.

Advantages Disadvantages
No need to save the 10% - 20% deposit typically required by a bank and non-bank. The strict lending criteria make approval difficult.
Most no deposit home loans include additional features such as repayment and redraw options. Only certain types of properties can apply for this loan.
Higher interest rates initially and because you are borrowing more money you will also pay more interest in the long term.
Borrowers will most likely be charged Lenders Mortgage Insurance (LMI) when you borrow more than 80% of the property price. In addition, extra costs such as stamp duty and legal fees.

Pre-approval

What is Pre-approval?

A home loan pre-approval illustrates clear guidelines provided by your lender, on how much money you have to work with, helping you narrow your property search and put you in a strong position to negotiate with a vendor or bid at auction.

A home loan pre-approval is similar to full finance approval except that the property you intend to purchase has not yet been determined. Some conditions usually need to be met before full finance approval will be granted.

What are the benefits of Pre-approval?

  1. Pre-approval can give you a good idea of the type of mortgage you will be qualified for and the price range you can afford.
  2. Provides proof to the real estate agent and seller that you are conditionally approved for a specific loan amount.
  3. When you have found the right property you can focus on the purchase process rather than having to sort out finance at the same time.
  4. Sometimes, sellers will accept an offer below listed price and take a property off the market because they know the buyer is serious.
  5. Is offered by most lenders at no cost

Getting your loan pre-approved can make sense from both a peace of mind and time management point-of-view but it is important to speak to your broker or lender to work out the best option for you.

Finance Buyers tip: once you find a house you like, ask your lender for a pre-approval letter that shows you’re approved up to that home’s asking price only. this will help discourage the seller from increasing the asking price.

 

 

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