Five Major Home Loan Types
There are five major types of home loans with hundreds of variations within each. These loans can most often be used in conjunction with one another or on a standalone basis.
Principal & Interest Loan
This is the most common loan. Payments are made up of a principal amount and an interest component.
The Reserve Bank of Australia (RBA) sets the official cash rate. The cash rate forms part of the cost (the rate) to the lender. However, because of intense competition between lenders in the variable rate market, most lenders will only change variable rates for existing loans when the RBA increases or decreases the cash rate.
Variable rate loans generally have no restrictions or penalties for making additional repayments on your loan. Therefore, you may be able to pay off your loan sooner. Additionally, variable rates will off you an advantage if interest rates fall, as your monthly minimum repayment will fall.
On a fixed rate loan, your interest rate remains the same during the entire fixed rate term, even if variable market rates change. The fixed rates offered by lenders can be either higher or lower than the variable rate at any given time therefore you need to make a comparison when considering this option. Most lenders offer fixed rate loans, generally for 1 to 5 year terms. At the end of the term, the interest rate usually converts to variable.
An investment loan typically has a higher interest rate, different lending criteria and a higher deposit required. Working with Simply Home Loans helps you navigate these specialised types of loans. For an investment property to work effectively you must consider the total cost of your investment, including (but not limited to) the loan repayment, body corporate fees, insurances and rates and utilities.
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Line of Credit
These accounts provide you with a “reserve” of credit on your account, then can be draw down at any time. Some line of credit loan accounts have more flexible repayment alternatives, providing a benefit of allowing you to manage your cash flow better. Most lenders charge extra for line of credit accounts, either by way of a facility fee, undrawn funds fees and/or a higher interest rate. In many cases, a standard loan with redraw can provide features similar to a line of credit at lower cost, so make sure you compare the options carefully.
This facility offers a sub-account into which you can deposit spare money. Prior to calculating the interest charge on your loan account, the balance of the offset account is netted off against your loan account, meaning that you save interest.