How to choose a home loan

Use our tips to negotiate the mortgage maze.
 
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  • Updated:19 May 2008
 

02.Types of home loans

Introductory loans

These are also called honeymoon loans. To attract borrowers many lenders offer loans with a low rate for a period such as the first year. After this time the loan reverts to the current standard variable rate. During the honeymoon period interest rates usually are fixed.

Trap: there are usually exit penalties if you decide to cancel the loan, for example if you want to refinance to a basic loan with a cheaper interest rate within the first three to five years.

Standard variable-rate loans

With a variable loan you borrow the money for a set period of time, during which you make regular repayments. The interest rate (and therefore your repayments) can vary during this time.

Standard variable-rate loans are generally the most flexible — offering the opportunity to redraw any extra money you’ve paid in, for example, and the option to switch to a fixed rate — for three years, say. They also generally have few penalties if you want to pay off the loan early.

Tip: ask your lender for a discount on the variable interest rate. Usually you can expect up to a 0.7% discount if you borrow a large amount such as at least $250,000 or even more if you borrow $500,000 plus.

Basic variable-rate loans

Basic 'no frills' loans are on offer from a number of lenders. They offer a lower interest rate than standard variable-rate loans, but have fewer features.

Some basic loans are quite restricted and can have significant disadvantages — they may not even allow extra mortgage repayments above the minimum repayments.

Tip: there are now some basic loans available with good features such as a redraw facility.

Fixed-rate loans

The interest rate is fixed for a period, usually between one and five years, after which a new fixed rate can be agreed, or the loan can revert to the lender’s standard variable rate.

A fixed-rate loan can be wonderful if interest rates go up, but very expensive if they go down. Fixed rate loans may also penalise extra repayments.

Trap: if interest rates are expected to rise, the fixed rate is likely to be above the variable rate. If the rate is expected to fall, it could be lower. Make sure you understand break costs and other conditions before you sign. Look out for fixed loans that allow you to make extra repayments without penalties (for example $10,000 per year).

Split or combination loans

Part of your mortgage is treated as a fixed-rate loan. You may even have several fixed rates and one variable rate. For example with a $250,000 home loan you could have $100,000 on a variable rate, $50,000 on a two-year fixed rate and $100,000 on a five-year fixed rate.

Tip: if you’re worried that interest rates will rise, splitting your loan between fixed and variable rates can offer an element of security and flexibility.

Transactional mortgage (all-in-one loan)

This is the most flexible type of home loan. In essence it's a home loan from which you can pay money off and withdraw money very flexibly — because the mortgage is run like a bank account. Normally all your deposits like your salary go directly into your mortgage account and you have access to any amount above your repayments via EFTPOS, ATM or a chequebook.

Trap: this loan gives you flexibility. However, it may require considerable self-restraint and determination to stick to a schedule of payments and reduce your loan when you have such easy access to your money.

Online loans

Online loans with competitive interest rates and flexible features are now available from several lenders. One direct (owned by ANZ), CBA non-guaranteed subsidiary HomePath and others like them all offer loans which have low interest rates, and include many of the features you’d expect from a standard variable home loan, such as redraw facilities and the option to split your home loan between variable and fixed rates.

Tip: these loans aren’t available through brokers or branches, only online or by phone.

Low Doc home loan

Low doc loans don’t require the same type of documentation required for a standard home loan. For example, if you’re self-employed you may not be able to fullfill the requirements for a standard home loan but may qualify for a low-doc loan. The downside is that interest rates are usually between 1% and 3% higher and lenders may not let you borrow more than 80% of the value of your home.

Tip: some lenders revert your interest rate down to their normal variable rate after a period of one to five years.

Want to know more?

For further information about no-deposit loans, 40-year mortgages and other home loan options, see our report, Risky home loans.

 

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