Purchasing a home almost always requires securing a loan from a bank or a mortgage lender. Even if you can pay cash for the property, borrowing all or part of the money needed offers advantages. For the many people who don’t have the entire purchase price of a property available upfront, a number of types of mortgage loans are available to property buyers. Let’s look at some of those options.
Variable-rate loans rely on the Reserve Bank of Australia and its changing cash rates and the fluctuation of interest rates. With this type of loan, the borrower can have lower payments over time, but if interest rates rise, so will the payments. This is a bit of a gamble, but some borrowers like this type of loan because it can be paid off faster by making extra payments, which will shorten the period of the loan and save interest. Also with this type of loan, you can borrow some of the money you have already paid in extra payments. This type of loan will also allow something called an offset account, where you put regular amounts into a special offset account that will be subtracted from your loan’s principal. If while you have this type of loan you find a better financing option, you can refinance, usually with no penalty.
Fixed-rate loans lock in the interest rate at the beginning of the loan for one to five years. Even though the interest rate for this type of loan are higher than those of a variable rate, it’s a good option for borrowers who are on a budget and don’t want to take the risks associated with variable rates. Many homeowners have a fixed amount they can afford for mortgage payments monthly, so there’s no concern that the payment will go up. However, it can be more complicated to refinance from a fixed rate to another type of loan and fees might be attached.
Interest-only loans are a good way to not have a traditional loan payment by paying only loan interest with no principal for a period of time. This is a good option for investors looking to resell the property quickly. It can also help young, first-time buyers because the monthly payment will be lower initially while they increase their income to afford a higher payment. But an interest-only loan is usually only valid for seven years, after which the borrower is required to begin paying down the principal. You can find the resources to see a comparison of investment home loans to find the best interest rate and terms for an interest-only loan.
A guarantor loan is one in which you find someone such as a family member to serve as a guarantor for a part of the loan or it uses someone’s salary to serve as a backup to your mortgage in case you default. Think of that guarantor as a co-signer to the loan. There is, of course, a risk for the guarantor if you don’t make payments on time or default, in which case they will be liable for the loan.
A low documentation loan is a good option for self-employed individuals or business owners who do not always have the traditional documentation required by many lenders, such as pay stubs. Instead, the lender relies on financial disclosure statements or bank statements. These types of loans typically have higher interest rates because of perceived risk.
Two other types of home loans available are considered nontraditional. The first is a line of credit loan that allows you to borrow against the equity or built-up value of your home for things such as home improvements. These are also known as equity loans. Non-conforming loans are used when a person has a low credit rating, has been unemployed or those who want to borrow more than the typical 80% of the home value. This type of loan has a high-interest rate and is usually only used for individuals with unique financial situations.
When choosing which type of loan is best for you and your circumstances, it’s wise to do the research to make certain the loan fits your financial needs.