From variable and fixed rates to bridging, low-doc and construction loans — here's a plain-English guide to the types of loan products available, and where each one fits.
With a variable rate loan, your repayments rise and fall with interest rates. If rates go up, so do your repayments; if they fall, your repayments fall too. These can be a good option in a lower-rate climate such as the one Australia has experienced since 2009. An important feature is that you can usually make extra repayments without cost to pay off your loan sooner — and you have the option of a 100% offset, which you don't get with a fixed rate loan.
The interest rate is fixed for a set period — usually one to five years (or up to 10 years for investment properties). When that period ends, you can fix again or move to a variable rate. The big advantage is certainty: you know exactly what your repayments will be, which helps with budgeting. The downside is that you won't benefit from lower repayments if rates fall, and breaking the loan before the fixed term ends could incur economic costs.
If you like the certainty of fixed repayments but also want features like a 100% offset, a split loan may suit you — part fixed, part variable. You might borrow $300,000 in total, fix $200,000 and keep $100,000 variable. Think of it as a hedge: if rates rise you're better off than with a fully variable loan, and if they fall you're better off than with a fully fixed loan.
Many lenders offer a reduced interest rate for a limited time at the start of your loan — a 'honeymoon rate' — generally for the first 6 to 12 months. The rate can be fixed or capped.
Advantage The rate can be lower than the standard variable rate, freeing up cash to help get your new home established.
Disadvantage There's usually a catch: once the introductory period ends, the rate often reverts to a level higher than the lender's normal variable rate. Weigh the early saving against the cost of a higher rate later.
Refinancing is essentially applying for a loan all over again. Lenders require a new home appraisal even if the original is only a few years old, and generally verify employment, income and ongoing debts. Any change to your status since the original loan was approved needs to be included.
Selling your home and buying a new one at the same time can be tricky — selling can take a while, leaving you without the proceeds to buy. A bridging loan lets you avoid matching up settlement dates, move quickly to buy your new home and give yourself more time to sell your existing property.
A professional package provides a range of discounts on bank accounts and lending products in exchange for an annual fee. The discount is determined by the total size of your borrowings — the more you borrow, the larger the discount, up to around 0.80% p.a. off the standard variable rate. It applies for the life of the loan (or until you cancel the package), and usually requires you to open a transaction account and credit card with the lender.
These specialised loans suit people who have a blemish in their credit history, such as a default, or who want to finance a property with unusual characteristics.
Advantage You can still apply even with a poor credit rating.
Disadvantage The interest rate is generally higher than for traditional loans.
Suitable for borrowers who are unwilling or unable to provide full income documentation — generally the self-employed or casual employees.
Advantage You may only need a statement or other documents confirming your income, plus a declaration that you can meet the repayments.
Disadvantage Compared with a traditional loan, these generally carry a higher rate and are available only at lower Loan-to-Value Ratios (LVRs).
Most suitable for retirees who own their home but want to release cash.
Advantage Unlike a traditional loan, there are no periodic repayments. You can take your money as a lump sum or a line of credit, unlocking equity without selling your home. The loan generally isn't repaid until the property is sold or the owner passes away.
Disadvantage Interest accumulates against the outstanding balance and can become expensive over time, and there may be numerous fees and insurance costs added to the up-front fees.
A short-term loan used to finance the building of a home or another real-estate project. The builder or buyer takes out a construction loan to cover costs before obtaining long-term funding. Because they're considered fairly risky, construction loans usually carry higher interest rates than traditional mortgages.
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