Unless they’ve struck gold with the lotto or have an inheritance to fall back on, most Australian homeowners will require some kind of financial assistance to purchase a home. But with an increasing amount of home loan options and lending services on the market, borrowers can be left feeling a little confused and wary of which type of loan to choose. To help you commence your journey as a homeowner, we thought we’d explain the different types of home loans available and what kind of borrower is best suited to each option.
Want to discuss what types of home loans there are with a home financing advisor? Contact Oak Tree Finances on 0404 403 066 for a confidential discussion today.
Different types of home loans: Variable vs fixed
What are the different types of home loans?
As one of the most common types of mortgage loans, variable-rate loans work by adjusting the interest rates. Historically this used move in line with Reserve Bank of Australia’s changing cash rates but it can move for other reasons. This means that a borrower may pay lower interest one month and higher interest the next. With flexible rates also come flexible repayment options, which is why so many homeowners choose this option. These flexible options include paying additional money on top of scheduled repayments with no penalty, which can significantly shorten the length of your mortgage term and reduce overall interest. Some lenders may also offer offset accounts or redraw facilities as well.
Fixed rate loans
Fixed rate home loans mean that the interest owed does not fluctuate with the market. This provides a greater sense of security to some homeowners, who know exactly how much they’ll need to pay each month for a certain time period. However, with certainty, does come some downsides, with the main one being that most loan providers won’t allow borrowers to pay additional money without incurring a penalty. Borrowers will also be locked in for the period of the fixed rate, which could result in them paying interest rates that are higher than the current market.
Different types of home loans for borrowers
What types of home loans are there for borrowers who are self-employed?
Low doc home loan
Securing a home loan as a freelancer or business owner is notoriously tricky, as most people don’t have the documentation required to prove an ongoing stream of income. For a low doc home loan, a borrower will typically only have to supply a lender with one of three methods of substanting their income. A letter from their accoutant or Bank Statements or BAS statements. As long as the borrower can afford the repayments and substantiate this via one of the three methods, securing a low doc loan from an agreeable lender shouldn’t be too difficult. There are also options for bad credit borrowers to get a low doc home loan. The only major downfall with a low doc loan is that a borrower will have to pay higher interest rates and fees as they’re considered a higher risk borrower.
What are the different types of home loans for borrowers with bad credit history?
Worried you’re not a viable candidate for a loan? Luckily, there are plenty of loan providers that offer non-conforming loans. These types of home loans are ideal for borrowers with a bad credit history or have unique circumstances such as being unemployed for a large time period. A non-conforming loan is like a low doc loan as the lender can be more flexible in what documents they require and how they assess a borrowers situation. Like a low doc loan, a borrower applying for a non-conforming loan can expect to pay higher interest rates than a conventional loan.
Types of mortgage loans for borrowers with a low deposit
If you haven’t been able to secure a high enough deposit for a loan, you have the option to go for a guarantor loan. A guarantor loan is a good option if you don’t want to pay lenders mortgage insurance and have a family member who is willing to act as the guarantor should you fail to pay your loan on time. Though this is a great deal for those looking to dip their toe in the property market, borrowers are urged to have an in-depth discussion with family members before signing. This is because a family member’s property will likely be used as collateral if the borrower defaults on their loan.
* This content is intended as general advice only and does not take into account an individual’s circumstances. Please do not act upon any of the information contained here within without speaking to your home loan broker or independent mortgage broker beforehand.
We hope our article on ‘What are the different types of home loans’ has given you a clear idea of the common types of home loans available. If you’d like to discuss your home loan options with a specialist, contact Oak Tree Finance today on 0404 403 066 or by filling our online form and we’ll get back to you shortly.