Understanding types of loans

There are a range of different home loans to suit a variety of first time buyers in the mortgage marketplace.

Fundamentally, these loans are all based on principal (the amount of money you borrow) and interest (how much you pay to borrow the money). Paying principal and interest will see you repay your loan soon – and your equity grow quicker. With the ability to personalise loans now more than ever before, here are several home loan options available:

Variable rate loans

The interest rate on variable rate loans fluctuate in line with market conditions and, as a result, your mortgage repayments will move up and down in line with these rates. You’ll need to allow for the possibility of future rate rises before you sign up to a variable rate home loan.

Best feature: You're able to make extra repayments—usually, without cost—to pay off your loan sooner. 

Fixed loans

This interest rate locks you into a set payment over a period of time, generally ranging from one – five years. This is a more secure option, but is not as flexible as you won’t get the benefit of lower repayments if interest rates fall.

Best feature: Your repayments remain the same, meaning you can budget your loan repayments precisely.

Split loans

As its name suggests, this loan divides your loan into both variable rate and fixed loans.

Best feature: You get the best of both worlds.

Interest only

For a set period of time (generally one to seven years) this loan’s payments comprise of only interest without any repayment of principal.  At the end of this time, the loan reverts to a principal and interest loan and you start repaying the principal as well as the interest.

Best feature: You only pay interest on the money you have borrowed for a set period, which means your initial repayments are lower.

Line of credit

Combining your home loan with an everyday transaction account, this type of home loan allows you to draw from a fixed amount at any time, to pay for whatever you want. It’s like having a credit card with a big limit, but your place still acts as security for the home loan.

Best feature: You only pay interest on the funds you use, but you need strong financial discipline to ensure you pay off the principal as well as the interest.

Low-doc loans

Designed for self-employed people, low-doc loans allow borrowers to obtain finances without the paperwork of tax records and other documents, however, they may attract a higher interest rate.

Best feature: Minimal paperwork is required to secure your loan.

 

 

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