Types of Home Loans

The Introductory Honeymoon Loan

This loan was designed initially by marketing merchants, allowing them to quote and advertise an artificially low rate in order to achieve sales. The loan gives you a cheaper rate for normally 12 months and then reverts to the standard variable rate for the rest of the term of the loan. Penalties normally apply should you wish to break the term of the loan within the first 3 years. This is generally not a good long-term choice. The loan does have benefits however for those who have a definite short-term cash flow problem.

Variable Rate Loans

A traditional style loan, the most common in Australia with repayments calculated as principal and interest generally over a 30-year term.

All variable rate loans may vary in rate either up or down over the period of the loan. These tend to be the most flexible type of loans with features such as extra repayments, offset accounts, redraw facilities and repayment holidays.

Fixed Rates

Fixed rate loans allow the borrower to lock in the interest rate for a pre-determined term from 1-10 years, ensuring that loan repayments will not change over that term. This is particularly useful for those on a tight budget and those with large borrowings, who need the security of a fixed repayment without having to feel at risk of interest rate hikes.

The disadvantage of fixed rate loans is that they tend to be inflexible. Extra repayments are not normally allowed, redraw is not allowed and penalties for early payout can be quite stiff.

Some lenders do allow both extra repayments and redraw on fixed rates so if that is what will suit you, make sure to ask our consultants which lender offers such features.

Professional Packages

Some lenders offer discounts either to professionals or to those applying for loans greater than $150 000.00. A very popular style of borrowing since the loan has all the features of a standard variable loan with a 0.4% to 0.8% discount. Most lenders normally charge an annual fee of approximately $300.00 and then deliver a set of benefits for the package including a discount off the normal rate, no application fees and banking discounts.

Line of Credit

Traditionally an overdraft facility, these loans were brought into the consumer arena by financial planners designing quick, non-tax deductible, debt reduction for their high-income earning clients.

A line of credit is essentially a giant credit card where funds can be drawn up to a pre-determined approved limit. Any funds paid into the loan can be drawn out again up to the limit. Used properly, this style of loan can significantly reduce interest costs.

This loan is suited firstly to cautious spenders and controlled budgeters who have fairly significant excess monthly savings, looking to pay their loan off sooner. Secondly, the loan is commonly used by investors for flexible access to unutilised equity in their own home in order to make further property or share market investing. An excellent tool for wealth creation.