Smart Finance: A Look At 3 Types Of Home Loan

That article is about Smart Finance: A Look At 3 Types Of Home Loan. If you are looking to buy either an investment property or a new home for yourself, it pays to know a bit about the different loan types in Australia. The three main types, which most people seek out, are: Standard variable, fixed interest and interest only loans.

Smart Finance: A Look At 3 Types Of Home Loan

Standard Variable Loans

As the name suggests, with variable home loans, the interest rate is subject to change during the life of your loan. The biggest influence to the changes is the Federal Reserve Bank, which sets interest rates for lenders, in most cases, the banks. Lenders will often follow suit, and raise, or sometimes lower the interest rate for the borrowers.

This is one of the more popular types of loan, as the terms are generally flexible, to allow for the fluctuating interest rates. A great way to stay ahead with your repayments is to have your salary paid directly into your loan account, and use your redraw facility for expenditure, keeping in mind your planned budget.

Key Benefits:

  • Most banks offer a re-draw facility, meaning you can access your money at any time.
  • Generally, there are no penalties for higher or more frequent repayments.
  • You can transfer the loan to another property if you decide to sell.

Fixed Rate Loans

Unlike a variable loan, with a fixed rate, you can negotiate to fix your interest rate for a set term of several years, so that you do not fall prey to interest rate changes. At the end of your fixed term, you can either begin a new term at the new interest rate or change over to a variable rate loan. The pitfalls of this type of loan are that if the interest rates drop substantially, you can end up paying more than the average borrower, however this also works in reverse, if the interest rates rise, you will be then have to pay the revised, higher rate.

Key Benefits:

  • Fixed repayments
  • Savings if the interest rates rise

Interest Only Loan

Interest only loans can have either a fixed, or variable interest rate, however with this type of loan, you only pay the monthly interest, and nothing off the principal lending amount. These types of loans are popular with investors looking to expand their portfolio without it leading to cash flow problems should the interest rates rise.

The biggest downside is that after your 5 year interest only term, you still owe the full amount of your loan. This is not the type of loan that average homeowners should seek out, as it is highly expensive in the long run, and it takes much longer to build any equity.

Key Benefits:

  • Low repayments initially
  • Allows investors to invest without a large cash amount
  • Investors can negative gear, and enjoy larger tax deductions

For up to date and contextual information, ask your lender which loan is right for you, and make sure you understand the terms and conditions of the loan, which are generally in the lenders favour! As with all financial advice, this is a guide only, and your individual circumstances may differ from the average investor or home buyer.

Once you have secured your pre-approval for a home loan, it’s time to start house hunting! LWP property group have some of the most beautiful house and land packages Perth has to offer, both north and south of the river. Visit one of their display homes today, to see your dream take shape.

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