Home Loan Types Advantages & Disadvantages
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
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If interest rates drop, repayments might drop
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Generally, additional or extra payments reducing the principle can be made without penalty, allowing the home loan to be paid off faster.
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Additional repayments can usually be taken back by you.
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This product is flexible and often has more features. |
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Disadvantages
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If interest rates rise, repayments might rise along with the amount of interest paid. The borrower is then required to make larger repayments.
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Generally attract a higher interest rate than basic home loans. |
Basic variable loans are loans with lower interest rates, but with fewer features than a standard variable loan.
Advantages
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Lower interest rate than the standard variable loans (usually around 0.5% less)
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Repayments are lower than standard variable loans
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If interest rates drop, repayments also drop. |
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Disadvantages
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Usually not as flexible as standard variable loans (not portable)
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Offer less features
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If interest rates rise, repayments also rise. The borrower is then required to make larger repayments. |
Discount Variable/Honeymoon/Introductory Loans are variable rate loans with a discounted interest rate off the standard variable rate (commonly over 1% less), lasting a certain period of time, usually 1 year.
Advantages
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Among the lowest rates available
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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. |
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Disadvantages
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Repayments increase after the introductory period, since the interest rate reverts to the standard variable rate
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May have early repayment fees (or exit fees). |
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
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Disadvantages
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Reduced flexibility
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If interest rates fall, the repayments will not, as the rate remains fixed
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Additional repayments are limited, and exceeding these limits may incur break costs/fees |
Split loans allow borrowers to take part of their loan as a variable rate loan and the other part as a fixed rate loan.
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
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Most flexible product available
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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
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Since it is secured by residential property, the interest rate is less than business loans, credit cards or personal loans |
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Disadvantages
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Requires discipline to ensure that over time the principle/balance of the loans 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)
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Interest rates can be higher than for the other types of 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.
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
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Borrower completes a simple income declaration form.
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Limited or no tax returns required
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Limited or no financial reports required |
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Disadvantages
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Specialist lenders offer non-conforming loans to people who don't meet the bank's stricter lending criteria.
Advantages
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Rates are much lower than they were in the past
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Non-conforming loans can be fully featured
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Great way to rebuild a poor credit rating |
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Disadvantages
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Rates are usually around 1-3% higher than a traditional loan, but rates depend on your level of credit impairment
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You might have to pay a heft deferred establishment fee if you pay out the loan early |
You can now borrow up to 106% of the purchase price of a property allowing you to also borrow the money to pay for extras such as stamp duty.
Advantages
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Disadvantages
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Stricter lending criteria makes approval more difficult
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You are limited to certain types of properties
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As you are borrowing more money, you'll pay more interest in the long term
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Mortgage insurance will be higher than "deposit" home loan products |
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