Loans explained

November 30, 2017
David Thomas

Interested in buying, upgrading or renovating? When obtaining credit for a property, it's important to understand the different types of loans available in order to ensure you get the best kind for your circumstances. With so many loans available providing different features for different purposes, selecting the right mortgage for you can be a massive headache. To help get you started, here is a list of 6 of the most popular loan types and their features:

FIXED RATES
As the name so aptly suggests, a fixed rate loan has fixed interest and therefore fixed loan repayments. Essentially, obtaining a fixed rate loan can offer you the certainty that your interest won't increase for the agreed upon loan term - regardless of national rate rises. However, if interest rates drop, having a fixed rate loan can see you paying more as your rate is still fixed to the higher amount. On top of this, fixed rates often allow little to no extra payments off your loan - meaning you are unable to get your loan paid sooner.

Fixed rate loans can vary in length but generally last for a period of 1-5 years, even if the total length of the loan may be 25+ years. After the fixed rate term is complete, you can decide whether to fix your interest for another term at the current market rates or convert the loan to a variable interest rate.

Benefits 

  • Certainty in interest rates
  • Allows simpler budgeting

Drawbacks

  • Interest rates won't drop with market drops
  • Allows limited additional loan repayments

VARIABLE RATES
Variable rate loans, on the other hand, determine the rate of interest charged based on movements by RBA (market rates). Basic variable loans are perfect for those looking to pay a consistent amount however have far less flexibility than standard variables and are not suitable for those looking to smash through their repayments.  

Benefits

  • Repayments drop in alignment with official interest rate cuts
  • Standard variables offer flexibility in terms of additional payments and redraw facilities
  • Allows you to pay mortgage more quickly through additional payments/paying less interest

Drawbacks

  • Repayments rise in alignment with official rate increases
  • Standard variables will often have higher interest rates than basic variables a they offer additional flexibility

SPLIT INTEREST RATE
A loan with a split interest rate is just as the name infers - one segment is fixed and another is variable. As you are able to choose how much is allocated to each segment, these don't have to be equal and can be tailored to suit your own needs.

Benefits

  • Partial certainty in interest rates (on the fixed)
  • Offers simpler budgeting (on the fixed)
  • Allows you to pay mortgage more quickly through additional payments/paying less interest (on variable)

Drawbacks

  • Repayments rise in alignment with official rate increases (on the variable)
  • Allows limited additional loan repayments (on the fixed)

INTRODUCTORY LOANS
Introductory loans are designed to attract borrowers who need a lower initial rate. Introductory loans may entail either fixed or capped rates and generally last around 1 year before reverting to standard rates.

Benefits

  • Generally the lowest interest rates available 

Drawbacks

  • Payments generally increase after the introductory period

INTEREST ONLY LOANS
Interest only loans allow you to pay just the interest during a predefined period (usually 1-5 years). At the end of this period, you are then required to start making principal repayments on the remaining balance of the loan 

Benefits

  • Lower initial payments, allowing you more funds for things like renovations or extensions
  • Beneficial for investors (short-term) as allows them to make greater contributions to their place of residence

Drawbacks

  • Repayments can increase substantially once the interest only period ends
  • Lenders will assess your ability to repay the loan only on the principal and interest repayments, reducing borrowing capacity

LOW- DOC LOANS
Low-doc loans are most appropriate for the self-employed or investors seeking to purchase, refinance or renovate a property.  As the income of the borrower can be more difficult to substantiate in these circumstances, Low-doc loans generally carry higher interest rates and less flexibility than other loans.

Benefits

  • No tax returns or financial reports are required
  • Simple income declaration form
  • Fully serviceable loan options, redraws, line of credit, variable or fixed rates
  • Offer principal & interest or interest only loans

Drawbacks

  • Generally higher interest rates

For further information, and to put yourself in the best position with valuable information and guidance, contact a trusted consultant from Mortgage Choice on 07 3286 7711.

Posted in: Home loans

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