Whether you’re a first-time or repeat buyer, when it comes to purchasing properties, picking the right loan is one of, if not, the most important steps.
If you pick the wrong type of loan, you might find yourself blind-sided by surprise fees, or caught in an application process taking longer than it needs to — and that can bring the entire purchasing process to a grinding halt.
Normally, lenders will offer many types of home loans, and it’s hard to predict the perfect one for you. Everyone’s circumstance is different, and a type of loan that works for you may not work well for another person.
However, with a deep understanding of each type of loan available, you can ensure you pick the best one for your situation.
With that, we aim to assist you in being fully prepared to go into the purchasing process by breaking each home loan type down.
Variable-rate Home Loan
This is Australia’s most common home loan option. The variability comes from the fact that the market condition, set by Australia’s Reserve Bank (RBA), will affect how much or how little a borrower repays every month.
There is a slight risk factor in this loan type. It’s difficult to plan ahead due to the fluctuating market. Yet, that doesn’t mean this loan is without its benefits.
A variable rate home loan will allow for additional payments and the ability to redraw. This means if you choose to, not only can you pay off your mortgage faster — reducing your own owed interest — but you can also re-borrow some money you’ve repaid to fund holidays and large purchases.
This is a good option for borrowers who aren’t relying on a fixed rate and are able to pay less or more each month.
Fixed-rate Home Loan
A fixed-rate home loan is exactly what it sounds like. As opposed to the fluctuation on the variable rate, borrowers will agree upon a fixed rate of repayment every month. This is a strong option for those who wish to plan ahead, or who live on a budget.
With a fixed-rate home loan, the chances are you won’t be able to redraw from your loan, and if interest rates do drop, you will pay more than those on a variable rate. Though, that works both ways should interest rates also rise.
You’ll want to choose this home loan type if you wish to plan your finances and never be caught off guard.
Bridging Loan
Bridging loans are short term, and vital for those with hard-to-sell properties. They usually extend as far as six months, and they have higher interest rates than variable or fixed-rate loans.
If you’re eager to get into your new home while your old property is still on the market, a bridging loan will help “bridge-the-gap”. It can work as your new home’s deposit while you wait for the profits of your old home to reach your bank account.
The risk with this loan, however, is that you can end up paying two mortgages. Once you’ve made the down-payment on your home, there’s a chance you’ll find yourself paying back the bridge loan and the house’s standard mortgage. Therefore, only pick this option if you’re confident your old home will sell within the six-month term.
Interest-only Home Loan
This option comes with the cheapest repayments, and this makes it good for low-income earners or those wanting to see more money in their account month-to-month.
However, while this may sound tempting, interest-only home loans come with lessened equity. Since you’re only repaying the interest, you won’t “own” more of the home than what you earned on your initial down-payment.
These types of loans normally only last up to 5-years, and after that, you must repay the principal of the loan at a fixed or variable rate, and that’s when your equity will increase.
Because of this, lenders will often assess your capabilities to repay the principal before they approve an interest-only loan.
You’d only want to pick this loan if in 5-years you’ll be earning more, or have more income saved. It’s effectively a short-term solution, allowing you to make ends meet.
Line of Credit Loan
The line of credit home loan works differently than the above options. Before you apply for a line of credit loan, you need to have equity on your property. Once you do, you can start borrowing from your mortgage. Line of credit loans works similarly to a credit card. However, they come with the risk of extra repayment on your fixed/variable loan or longer terms.
If you’re secure in your income and need that little extra to fund a holiday or a large purchase, a line of credit loan is the perfect option. But, if you’re an impulsive buyer, or in a position where you’re liable to be losing money, stay well away.
Non-Conforming Loan
This is the loan you should pick if you have a poor credit history, are unemployed, or have insecure finances. It’s vastly larger than the previous loans — with borrowers sometimes asking for up to 80% of the property value!
This loan comes with a risk to the lender, and so to ease that you’ll have to pay higher interest rates, and needing to offer proof that you can in fact repay the loan. This can be in the form of credible references, or in the case of being employed, a steady income that isn’t going anywhere.
This is a good option for younger buyers yet to climb the property ladder or those in need of a home who are recovering from a rough situation.
Queensland Housing Finance Loan
The Queensland Housing Finance Loan may be available for Queenslanders who can afford to buy or build a home but cannot get private finance from a bank or building society.
This loan can be used to buy an established house, unit, town-house or duplex, or to build a house.
To be eligible you must:
- live in Queensland and be a citizen or permanent resident of Australia
- not own or part-own another property
- have a household income under $141,000 per annum
- intend to live in the home
- have a good credit history
- have no significant debts
- have a regular savings history
- have savings to cover the deposit and other costs, such as legal fees, stamp duty and insurance
- be able to afford the loan repayments without hardship
- have earning potential for the term of the loan.
Let Calibre Real Estate Help You
Being stuck with the wrong type of home loan can ruin your finances.
Here at Calibre Real Estate, we can assess your situation and advise you on the best option for your own finances and lifestyle.
If you want security in your lending decision, we are the right agent for you.
Our expert knowledge, paired with our commitment to our clients, means that we are the only agency you need on board when looking to finance your property.
Contact us on 07 3367 3411.
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