A mortgage is essentially a loan for a house. It’s more complicated than that, though, as Australian borrowers have many different loan types to choose from. Home buyers must evaluate their financial situation, loan terms, their age, financial aspirations and many other factors when determining which type of loan is right for them.
Fixed Rate Mortgage
This is the most basic home loan available. Just like the name implies, the interest rate in this type of loan is fixed and will not change. It is negotiated during the loan application process and stays the same. This is the best loan for stability and financial planning but some borrowers find variable rate loans more attractive because of the possibility of cost savings if interest rates drop.
Variable Rate Mortgages
The interest rate assigned to a variable rate home loan is tied to the rates published by the Reserve Bank of Australia. Instead of being locked, the interest rate in this type of loan changes. Some borrowers find the prospective savings attractive while others don’t like the risk involved. There are two different varieties of variable rate mortgages: “standard” and “basic.” A standard variable rate home loan comes with additional features like the capacity to split the loan, make more frequent payments and more. These features come with increased fees. Borrowers who want to save in fees and don’t need these features are better served with the basic variable rate mortgage type.
Split Mortgage
A split mortgage is also referred to as a “combination mortgage.” This type of home loan can be negotiated from the start of the loan process or a standard variable rate loan can be split later if its features allow for it. With a split mortgage, the borrower breaks out the loan into two loans, one fixed and one variable. This allows consumers “the best of both worlds” with the stability of a fixed rate mortgage and the possible savings of a variable rate mortgage.
Low Deposit Mortgage
A low deposit home loan offers borrowers a way to establish home ownership even though they may not have adequate cash on hand for a proper down payment. Borrowers with adequate monthly cash flow for payments but not enough money saved up can borrow anywhere from 90 to 97% of the home’s price with a low deposit mortgage. The drawback is that this type of loan will have higher fees and interest rates and more restrictive terms.
No Deposit Mortgage
A 100% home loan, as this is alternatively called, is aimed at a similar customer as the low deposit mortgage. The difference is the prospective borrower for this type of loan has good cash flow but no money at all for a down payment. This loan is a good last resort for some buyers to get into the market but it’s not desirable for anyone else, as it has the highest rates, fees and restrictions around.
Home Equity Loan
This type of loan is also referred to as a “revolving credit mortgage” or “line of credit home loan.” With a home equity loan, the home’s equity acts as a line of credit the home owner can borrow against. For many home owners, this is a great source for funds for things like home improvement. It’s risky, though, because some customers may borrow too much and end up in a condition known as negative equity.
Introductory Rate Mortgage
Also known as a “honeymoon loan,” this mortgage features a low interest rate for a set period at the start of the loan, followed by a higher rate later. This lowered rate period is typically for the first year of the loan, but that varies by financial institution. This is a great loan for buyers looking to pay off extra during the honeymoon period, but a word of caution is necessary: some lenders restrict additional payments with an introductory rate mortgage.
Low Documentation Mortgage
A lot of documentation is required to secure a home loan. This includes paystubs dating back a certain length of time and several years’ worth of tax returns. There are borrowers who don’t have adequate documentation in this regard, including new residents of Australia and the self-employed. Low documentation mortgages, also known as “low doc loans,” offer more relaxed documentation requirements. In order to mitigate risk, however, institutions that offer these loans do so with much higher fees and interest rates.
Bridge Mortgage
A bridging mortgage is a home loan intended for buyers in a unique situation. When you are trying to sell your current home and buy a new home at the same time, it can be a difficult trick to pull off. What a bridge loan does is it allows borrowers to buy a new home with the sale of their current one not yet completed. The loan covers the mortgage needs of both homes with the idea that funds from the old home’s eventual sale will cover the remainder of the loan.