Directory on the Different Types of Home Loans
Directory on the Different Types of Home Loans
If you’re on the hunt for your first home, you know there are a lot of decisions to make. Finding which type of loan best suits your needs is probably the trickiest aspect of this journey.
But don’t worry, we’ve got you covered! This FREE resource tackles everything from basic mortgage types through to helpful tips about getting started with loan pre-approvals.
So get ready – real estate expert tips incoming!
What are Home Loans?
And How Do Home Loans Work in Australia?
A home loan, also known as a mortgage, is a type of loan that is used to purchase a house or property. Aus home loans are typically provided by banks, credit unions, and other financial institutions.
In Australia, all types of home loans work by allowing individuals to borrow a certain amount of money from a lender to purchase a property. The borrower then repays the loan, plus interest, over an agreed period of time.
The property serves as collateral for the loan, so if the borrower defaults on the loan, the lender can foreclose on the property.
How to get a mortgage in Australia?
The process of applying for home mortgages typically involves the following steps:
Pre-Approval
Before you start looking for a property, it’s a good idea to get pre-approved for a home loan. This will give you an idea of how much you can borrow and what your monthly payments will be.
Finding a property
Applying for the loan
Once you have been pre-approved for a home loan, you can start looking for a property that you would like to purchase.
Property valuation
Approval
Settlement
Types of Home Loans
Below are the different types of house loans in Australia:
1. Construction loans
Construction loans are types of loans that are specifically designed to help individuals and companies finance the cost of building or renovating a property. These loans typically have a shorter term than traditional mortgages.
They are often used to fund the construction of new homes, commercial buildings, and other types of real estate projects. They typically have different requirements and interest rates than regular home mortgages, as the lender is taking on more risk by lending money for a property that does not yet exist.
The loan will typically have a draw-down period, where the borrower can draw on the loan as required for the construction, and only pay interest on the amount drawn down.
2. Guarantor loans
A guarantor loan is a type of mortgage loan which uses an individual’s assets or credit standing to guarantee the loan. The guarantor agrees to take responsibility for the debt if the borrower defaults on payments or fails to meet the terms of their loan.
Generally, guarantor loans are unsecured and have much lower interest rates than other types of personal loans. This type of loan can be useful to those with a poor credit history who may struggle to obtain traditional financing from banks or other lenders.
You can have your parents, siblings, relatives, or even ex-spouse to act as your guarantor.
3. Owner-occupied home loans
An owner-occupied home loan is a type of mortgage loan used to purchase a property where the borrower intends to live in the property as their primary residence. These loans are typically considered to be lower-risk by lenders, as the borrower has a vested interest in maintaining the property and keeping up with the repayments.
These loans usually come with features such as redraw facility, offset account and the ability to make extra repayments, which can be beneficial for borrowers. Additionally, some lenders may also offer different types of loan structures, i.e., fixed-rate or variable-rate loans, or split loans, to allow borrowers to choose the loan that best suits their needs.
Some lenders may have different policies for owner-occupied home loans, such as a minimum income requirement or a maximum loan-to-value ratio (LVR). This pertains to the maximum amount of the loan compared to the value of the property. Additionally, there may also be different requirements for first home buyers or second home buyers.
4. Fixed rate loans
Fixed rate loans are a type of loan where the interest rate remains the same for a set period of time, typically between 1 to 5 years. This means that the borrower’s repayments will remain the same over that period, which can make budgeting and managing repayments easier.
This home loan type is popular among borrowers who want to lock in a low interest rate and ensure that their repayments will not change over the fixed rate period. After the fixed rate period, the loan will usually revert to a variable rate, which can change in response to market conditions.
While fixed rate loans offer the stability of fixed repayments, they may be less flexible than variable rate loans. They may also have higher interest rates, penalties or fees associated with breaking the fixed rate period.
5. Variable rate loans
A variable rate loan is a home loan type where the interest rate can change over time. The interest rate is determined by the lender and can fluctuate in response to market conditions, such as changes in the official cash rate set by the Reserve Bank of Australia (RBA). This means that the borrower’s repayments can change over time, which can make budgeting and managing repayments more challenging.
Variable rate loans are popular among borrowers who want the flexibility to make extra repayments or redraw on their loan without penalty. They can be more suited for borrowers who expect to have an income increase over time. They usually come with a redraw facility, which allows borrowers to access extra repayments that they have made, and this can be useful for unexpected expenses.
However, it’s important to note that when interest rates rise, the repayments on a variable rate loan will increase. This can be difficult for some borrowers to manage.
6. Split loans
A split loan is a type of loan where the borrower splits their loan between a fixed rate and a variable rate. This allows the borrower to take advantage of the benefits of both types of loans.
For example, they may choose to fix a portion of their loan to provide certainty and stability in their repayments, while maintaining the flexibility of a variable rate loan for the remainder of their loan.
This way, borrowers can take advantage of the benefits of a fixed rate loan. They get the ability to budget and manage repayments more easily, while also taking advantage of the flexibility and potential lower interest rates offered by variable rate loans.
7. Investment home loans
An investment home loan is used to purchase a property that will be used as a rental property or for other investment purposes. Investment home loans are similar to traditional home loans, but they often have different lending criteria and interest rates.
Lenders may require a larger deposit. They may also take into account the rental income generated by the property when determining the borrower’s ability to repay the loan.
Investment home loans usually have a higher interest rate than owner-occupier home loans, as they are considered to be higher-risk. This is because the property is being purchased as an investment, rather than as a primary residence. Therefore the lender may see a higher risk of default. Additionally, lenders may also require an assessment of the property’s rental income potential and a higher deposit may also be required.
8. Bridging loans
Bridging loans in Australia are short-term loans that are used to “bridge” the gap between the purchase of a new property and the sale of an existing property. These home loan types are typically used by individuals or companies who need to buy a new property before they have sold their current one.
Bridging loans are typically more expensive than traditional mortgages due to the added risk to the lender. They are commonly used for property purchases where the buyer needs to move quickly and the sale of the existing property will take some time.
They are also used for refinancing, development, or commercial property purchases. They can be secured by either the new property or the existing one, and usually have a term of 6-12 months.
9. Refinance home loans
A refinance home loan is a type of mortgage loan that allows a borrower to replace their current mortgage with a new one. They can refinance with their current lender or with a new one.
The borrower can use the loan to pay off the outstanding balance on their current mortgage. Then they can take out a new loan with different terms, such as a lower interest rate or a different loan term.
The main benefit of refinancing is that it can lower the borrower’s monthly mortgage payments and overall interest costs. However, it’s important to consider the costs of refinancing, such as application and legal fees, before deciding to refinance.
10. Low-doc home loans
A low doc home loan is designed for self-employed borrowers or those who have difficulty providing the traditional documentation required by lenders when applying for a home loan.
Low doc home loans may have higher interest rates and require a larger deposit than traditional home loans. They are also typically offered by non-bank lenders, who have more flexible lending criteria.
Borrowers of this type of home loan need to provide less documentation than traditional home loan. This includes an accountant’s declaration or a business activity statement, instead of complete financial statements.
11. Reverse mortgage
A reverse mortgage allows homeowners aged 60 or over to borrow money using the equity in their home as collateral. The loan is called “reverse” because instead of making payments to the lender, the lender makes payments to the borrower. The borrower can choose to receive the payments as a lump sum, regular payments, or as a line of credit.
The loan is typically paid off when the borrower sells the home, moves out permanently, or passes away. At that point, the lender is entitled to the proceeds of the sale of the home, up to the amount of the outstanding loan balance.
12. Non-conforming loans
Non-conforming loans, also known as non-conventional or non-conformist loans, are mortgages that do not meet the guidelines set by government-sponsored enterprises (GSEs). These loans are typically offered by private lenders or non-bank financial institutions. They are intended for borrowers who do not qualify for a traditional mortgage due to factors such as low income, poor credit, having just moved in the country, or an atypical source of income.
Non-conforming loans may have higher interest rates and require a larger down payment than traditional mortgages. They may also have more restrictive terms, such as shorter loan terms or higher fees.
Examples of non-conforming loans include, low doc loans, high LVR (loan to value ratio) loans, interest only loans, and non-resident loans.
It is important to note that non-conforming loans are subject to stricter lending regulations that traditional loans. They may no longer be available in some markets due to regulatory changes.
13. Line of credit home loans
A line of credit home loan allows the borrower to access a revolving line of credit secured against their home. The borrower can access the funds as they need them, up to a certain limit, and only pay interest on the funds they use. The borrower can also make additional payments or pay off the loan in full at any time without penalty.
Line of credit home loans are similar to a credit card, in the sense that the borrower can access funds as they need them. But unlike credit cards, the interest rates are typically lower. The borrower can also use the loan for a variety of purposes, such as home renovations, investment properties or to pay off other debts.
Line of credit home loans can be a flexible and useful financial tool, but it’s important to remember that they can be quite complex. The interest can accumulate quickly and become a large debt.
Work With Our Team of Mortgage Brokers Sunshine Coast
So, there you have it – everything you need to demystify home loans and get started on your Sunshine Coast property journey with confidence.
If you’re looking for more personalised help and expert mortgage advice, our team of qualified home loan brokers Sunshine Coast are here to assist. Our team provides Sunshine Coast locals with a wide range of financial solutions in business and life. With our experience and first-hand knowledge of the financial industry, we guarantee that you’re in good hands.
Don’t hesitate to get in touch today!
FAQs on home loans Australia
The first requirement is that you must be at least eighteen years of age. Additionally, lenders will assess whether or not you have a good credit rating and a stable income stream. To this end, you need to show proof of employment and provide details about any other sources of income. It’s also important to have saved enough money to cover the cost of a deposit. Generally speaking, lenders require a deposit between 5-20% of the purchase price of your chosen property.
In addition to meeting the basic criteria listed above, borrowers may also be required to provide documents such as bank statements and pay slips which demonstrate stability and affordability when it comes to repaying loans.
There are many ways to save on your home loan and reduce the amount of interest payable over the term of your loan. These include:
- Making extra repayments above the minimum each month if possible;
- Using an offset account to reduce interest accruing on the part of your balance held in the offset account;
- Consolidating debt into one lower interest rate loan;
- Taking advantage of any discounts offered by lenders;
- Refinancing to access more competitive rates; and
- Considering longer repayment terms or reducing your debt faster with shorter terms (if affordable).
In Australia there are various government initiatives that can support first time buyers. Grants such as First Home Owner Grants (FHOG) can help cover some upfront costs associated with buying property such as stamp duty fees. There are concessional stamp duty rates on certain properties purchased by eligible purchasers, depending on the state. There is also the First Home Super Saver Scheme (FHSSS) which allows eligible borrowers to make voluntary contributions up to $30K towards their first property purchase without having to pay tax on earnings.
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