This article looks at four common home loans and explores the advantages and disadvantages to each of them. When looking at a loan for a home or an investment property, many feel like they are flailing around in the deep end of a swimming pool! They often struggle with all the home loan options available and don’t know what is best suited to their situation. In an attempt to help overwhelmed home buyers, we shall cover 4 of the most common home loan options and explain their positive and negative aspects.
Variable Home Loans
A variable home loan has a fluctuating interest rate that goes up or down to match the interest rates set by the Reserve Bank of Australia. If the RBA raises the interest rate by 0.5%, then the interest rate on your home loan will also rise by 0.5%. There are also two main types of variable home loans — basic and standard. The basic option has the lowest ongoing interest rate, but there are fewer repayment options available. Standard variable loans have higher interest rates, but you also have a more repayment options. With the standard option you can make extra repayments and thus pay off your loan sooner. You can also redraw those extra payments back if you need the cash.
The Benefits
– Interest on your repayments will fall when the RBA or bank’s interest rate falls – Basic variable rates are good for first time home buyers (because of the low interest rates) – Standard variable loans provide numerous options that allow borrowers to pay off their mortgage quicker.
The Drawbacks
If the RBA raises its interest rate you will be paying a much higher interest rate.
Fixed Rate Home Loans
Fixed rate home loans allow home buyers to lock into a certain interest rate for a period of time (usually 1 to 5 years). At the end of your fixed term you can lock into another fixed rate or switch to a variable or split loan rate.
The Benefits
– Because rates are fixed it makes it easier for you to plan your finances and know what your repayments are going to be – If interest rates rise you will be unaffected
The Drawbacks
– Interest rates for fixed home loans are often higher, as you’re paying to be protected from rate rises – If the interest rate falls, you will be paying a significantly higher rate – With some lenders you may incur penalties if you want to make additional repayments
Split Rate Home Loans
Split rate home loans allow for a percentage of the home loan to remain at the variable rate and the remaining portion to be set at a fixed rate. Borrowers can determine the ratio of the split they want for their home loan (i.e. 50:50 or 60:40).
The Benefits
– Provides some protection against interest rate rises – Some offer the option of being able to make extra repayments (without penalty fees)
The Drawbacks
– Make sure your home loan provider doesn’t charge two sets of establishment and ongoing fees for both the fixed and variable components of your home loan – If rates rise, so will your repayments in the variable rate component of your loan
Equity Line of Credit Home Loans
Equity line of credit home loans allow you to use the equity in your home to finance other things, such as renovations or an investment property. When considering engaging in this kind of loan, it’s important to have a large amount of wealth deposited in the bank or good equity in your home.
The Benefits
– There are no set repayments, so your loan can be paid off anytime without advanced payment penalties – If you want your loan to be larger you don’t have to apply for a separate loan, you can just increase the original one – It’s flexibility makes it perfect for those who are investing or renovating
The Drawbacks
– Its flexibility can be dangerous to those who are undisciplined and it’s easier to fall into huge amounts of debt – It often has a higher interest rate
Getting the Right Advice
When looking at home loans it’s important that you receive proper financial advice. Financial advisers and professionals in the real estate industry have the experience and access to property valuation software that can help you work out the best loan for you and plan out your loan repayments.
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