Property Finance and Home Loan Types

There are many different types of home loan products on the market. So, before deciding on a product, you need to have a basic understanding of the most common loan types. Knowing the pros and cons of the different types of loans will help you choose the one that best suits your needs.

Not surprisingly, there isn’t a one-size-fits-all product. Your Zar Mortgage Broker will advise you on the different property finance types, help you find the loan type that is most appropriate for you, and will take care of all of the paperwork and application requirements.

Variable Rate Property Finance

Variable rate loans often provide additional flexibility and are the most popular type of home loan in Australia. The interest rate is variable and, therefore, fluctuates with the Reserve Bank of Australia’s movement and the cost of the financial institution sourcing funds to lend. Variable rates are generally broken into two loan types by financial institutions: basic and standard.

Basic Variable Rate Home Loan

The basic variable rate only covers the basic home loan features. With some lenders you will have access to features such as redraw facilities, and extra repayments, although you may not have access to an offset facility; however, this generally means the interest rate is slightly lower than other loan types. Different lenders offer varying facilities with the basic variable home loan product, so you should contact your Zar Mortgage Brokers Consultant to discuss the options you require to ensure a basic variable mortgage is suitable for you.

  • Pros – If the interest rate stays the same or decreases during the term of the loan, or if you’re only planning on keeping the property for a short period of time, you can save money. However, this strategy depends on your ability to sell the property.

  • Cons – These types of loans are unpredictable and there’s the risk of rate increases, meaning this will increase the amount of your monthly repayment. It’s important that you budget for the possibility of higher interest rates.

Standard Variable Rate Home Loan

The standard variable rate is traditionally slightly higher than the basic; however, you receive extra features such as an offset account, redraw facility, repayment frequency flexibility, portability and the option to pay in advance.

  • Pros – If the interest rate stays the same or decreases during the term of the loan, or if you’re only planning on keeping the property for a short period of time, you can save money. However, this strategy depends on your ability to sell the property.

  • Cons – These types of loans are unpredictable and there’s the risk of rate increases, meaning this will increase the amount of your monthly repayment. It’s important that you budget for the possibility of higher interest rates.

Fixed Rate Home Loan

Fixed rate loans have a fixed or unchanged interest rate for 1 to 15 years. In Australia, these loan types normally are not as flexible as variable rate loans; however, there are some lenders who offer the same flexibility (offset, redraw, extra repayments, etc.). Speak with your Zar Mortgage Brokers Consultant to ensure the loan includes all the features you require.

  • Pros – Fixed rate loans are predictable and there are no surprises—allowing you to maintain the household budget during the fixed period.

  • Cons – If the interest rates fall, with this type of loan, you could end up paying more. It may be possible to refinance, although lenders usually charge penalty fees.

Split Rate Home Loan

For some, split rate loans are “the best of both worlds.” With these loan types, you decide how much of your loan will be “fixed” and how much will be “variable” rate.

  • Pros – Never knowing for sure what interest rates will do, split rate loans protect both portions of the mortgage. If interest rates rise, you are protected on the fixed rate portion—if there is a reduction in interest rates, you are protected on the variable portion. And, you may make additional repayments on the variable portion of the loan.

  • Cons – These loan types may include charges on both the fixed rate and variable rate, such as setup fees, account fees and discharge fees. On the fixed rate portion of the loan, you may be penalised for paying off your loan early and for making higher repayments.

Introductory or Honeymoon Home Loan

Introductory or Honeymoon home loans give a discounted interest rate for the first 6 to 12 months. These types of loans are most popular with first home buyers to help offset the other expenses that accompany a new home. After this period expires, the loan reverts to the lender’s fixed or variable product and the interest rate usually reverts to the higher rate.

  • Pros – During the introductory period, the reduced repayments can help offset other expenses that accompany a new property. Although the majority of honeymoon loans revert to the higher rate after the introductory period, this is not always the case. Check with your Zar Mortgage Broker for more information on available honeymoon loans.

  • Cons – These loan types may have exclusions or restrictions. Many lenders limit the availability of features, such as redraw facilities, repayments, etc. In some cases, this can mean less flexibility over the term of the loan.

Interest Only Home Loan

Interest only loans are particularly popular for investors. The repayments of interest only loans will be lower than other ordinary loan types because you only pay the interest charges each month—the principal of the loan is paid only when convenient.

  • Pros – Investors can benefit from interest only loans, as these loan types allow you to secure the property with minimal cash. They are also a good option if your income fluctuates monthly, or if you will make a lot more money in the future. First home buyers may benefit from these loan types if they expect to upgrade from their starter home to a bigger home in the near future.

  • Cons – The problem with interest only loans is that the principal must be paid back at some point. When it does, the monthly repayment will skyrocket. In addition, these loan types pose a higher risk for the lender, therefore, usually carry higher interest rates. Additionally, your level of debt will not fall for the life of the loan. Interest only loans are intended as a short-term solution to your financing needs (about 5 years at the most); and if things do not turn out as expected (you lose your job, get hurt or injured, or property values decrease), these loan types could cost you your home and ruin your financial well-being.

Low Doc and No Doc Home Loan

Low Doc and No Doc loans are increasingly popular in Australia, especially for the self-employed and contractors. As the name implies, you require less documentation to take out the loan (proof of income and other debts, etc.). Since there are so many variations on these loan types, it is best to speak with your Zar Mortgage Broker when shopping for Low Doc and No Doc loans. Your mortgage broker will be able to sift through available options to find loan products that best suit your needs.

  • Pros – These loan types make it easier if your income fluctuates, is difficult to verify, or you don’t have the time to gather all the required documentation. Less paperwork means faster processing and approval. Also, low doc and no doc loans are helpful to the wealthy who prefer not to reveal their total income.

  • Cons – The cost of avoiding the financial microscope usually means a higher interest rate and/or additional fees to compensate for the lender’s perceived added risk. The lender may also limit how much you can borrow (60% to 80% of the value of the property). Although it is less work and usually easier to qualify for these types of loans, in the long run it is usually to your advantage to apply for a full doc loan.

Packaged or Professional Package Home Loan

If you are borrowing $250,000 or more, you may qualify for a discounted interest rate through a Packaged or Professional Package Home Loan. These loan types offer a range of discounts and special offerings on loan products and bank accounts in exchange for an annual fee. Discounts are usually determined by the amount of the loan—the higher the loan amount, the higher the interest rate discount. Some lenders offer discounts off equity, fixed and standard variable loans with fixed rate discounts ranging from 0% to 0.25%, and a variable and equity rate discounts of 0.5% to 1%.

  • Pros – In addition to the discounted interest rate, these loan types may include other benefits: reduced mortgage establishment and monthly fees, fee-free banking on transactional accounts, annual fee waived on some credit cards, discounts on insurance products, future loans and other bank services.

  • Cons – Normally, these loan types incur a three-figure annual fee (about $300 to $400). If you don’t require or don’t utilise the other services that are included in the package, the annual fee may cost you more than the interest savings, especially as the loan balance reduces. In addition, some packaged home loans require that you open a transaction account and take out a credit card with the lender.