Home Loan Types

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Home loan types advantages & disadvantages

Standard variable home loans

With standard variable home loans the interest rate can vary throughout the term of the loan. That is to say the interest rate may go up or down during the loan term.

Advantages	Disadvantages
If interest rates drop, repayments might drop. Generally, additional or extra payments reducing the principle can be made without penalty, allowing the home loan to be paid off faster. Additional repayments can usually be taken back by you. This product is flexible and often has more features.	If interest rates rise, repayments might rise along with the amount of interest paid. The borrower is then required to make larger repayments. Generally attract a higher interest rate than basic home loans.

Basic variable loans

Basic variable loans are loans with lower interest rates, but with fewer features than a standard variable loan.

Advantages	Disadvantages
Lower interest rate than the standard variable loans (usually 0.5 – 1.00% less). Repayments are lower than standard variable loans. If interest rates drop, repayments also drop.	Usually not as flexible as standard variable loans. Offer less features. If interest rates rise, repayments also rise. The borrower is then required to make larger repayments.

Discount variable/honeymoon/introductory loans

Discount Variable/Honeymoon/Introductory Loans are variable rate loans with a discounted interest rate off the standard variable rate (commonly up to 1%), lasting a certain period of time, usually one year.

Advantages	Disadvantages
Among the lowest rates available. Repayments made at introductory rates can reduce principle quickly as there is less interest charged during the specified period, compared to higher variable interest rate loans.	Repayments increase after the introductory period, since the interest rate reverts to the standard variable rate. May have early repayment fees (or exit fees).

Fixed rate loans

Fixed rate loans are loans where the borrower’s interest rate and repayments are fixed for a set period, usually from 1 to 10 years, and sometimes longer.

Advantages	Disadvantages
Borrowers have certainty of repayment amounts. Even if interest rates rise, the repayments on these loans stay the same as the interest rate is fixed for the duration of the agreed period. This allows for budgeting into the future.	Reduced flexibility. If interest rates fall, the repayments will not, as the rate remains fixed. Additional repayments are limited, and exceeding these limits may incur break costs/fees.

Combination / split loans

Combination and split loans allow borrowers to take part of their loan as a variable rate loan and the other part as a fixed rate loan.

Advantages	Disadvantages
Offers borrowers a chance to hedge their bets in times of rising interest rates and gives a blend of repayment flexibility and interest rate security.	Variable portion is still vulnerable to interest rate rises. If interest rates rise, repayments on the variable portion also rise. The borrower is then required to make larger repayments on this variable portion.

Line of credit/equity loans

Line of credit/equity loans allow borrowers to borrow up to a specified limit which is secured by a registered mortgage over residential property. These loans provide access to funds, when required, up to the original limit set.

Advantages	Disadvantages
A very flexible product. Money can be used as needed and paid back in a flexible manner without structured minimum principle and interest repayments. The minimum required is the interest on the outstanding principal. Since it is secured by residential property, the interest rate is less than business loans, credit cards or personal loans.	Requires discipline to ensure that over time the principle/balance of the loan is reduced. Having a minimum interest only repayment does not require the borrower to reduce the principal (though some lenders do after a certain term). Interest rates can be higher than for the other types of loans.

Low documentation / no documentation loans

Low Documentation No Documentation loans are products available for borrowers who are normally self-employed or do not have tax returns or financial reports.

Advantages	Disadvantages
Borrower completes a simple income declaration form. Limited or no tax returns required. Limited or no financial reports required.	Generally attracts a higher interest rate, but increasingly lenders will revert to standard variable rates after consistent ‘on time’ repayments. ‘Regular’ rates can often be achieved by paying lender’s mortgage insurance.

Non – conforming loans

Specialist lenders offer non-conforming loans to people who don’t meet the bank’s stricter lending criteria.

Advantages	Disadvantages
Rates are much lower than they were in the past. Non-conforming loans can be fully featured. Great way to rebuild a poor credit rating.	Rates are usually around 1-3% higher than a traditional loan, but rates depend on your level of credit impairment. You might have to pay a hefty deferred establishment fee if you pay out the loan early.

Low and no deposit loans

Low and no deposit loans are suitable for borrowers with good, stable incomes but little or no genuine savings. No deposit loans are no longer available, however borrowers may be able to access alternatives such as family equity.