Australians have a great taste of buying property and have a great determination and commitment of investing in property. This has encouraged lenders to offer a number of loans to encourage this investment. There are several types of home loans in Australia and each of them has different conditions. They are mainly divided into three parts, that is: loans for home owners, loans for investors and loans for potential home buyers. In this article we are going to discuss each type of home loan in details and their interest rates.
Classification of home loans for shareholders
Investor’s home loans are mainly divided into two. These are:
1. Funding loan
In a funding loan, the investor often uses his current property as collateral. This is a type of loan used by the investor for an asset or property he wants to rent out so it can earn him income. In this case, the owner does not live in the property. This type of loan is best for entrepreneurs looking forward to creating wealth using real estate investment. However, in cases where your property may start losing value, you will still be required to make payments normally. You should pay more attention to calculating the returns you will get from the investment before making a decision of borrowing. Your returns must always out do the loan and investment costings.
2. SMSF loan
SMSF means a self-managed super fund. This is a type of loan where you use your retirement account to acquire money so you can fund your property investment. This type of loan gives you a chance to make profit at the comfort of your home when the market’s performance is high. This type of loan is best when you want to use your retirement funds into property investment. This loan tends to be much more expensive than normal loans because it has standard borrowing requirements. Ensure that you have saved up extra cash to cater for renovations and maintenance because this type of loan does not finance such services.
Classification of home loans for first time home owners
this section illustrates a number of loans a first-time home buyer can apply for:
1. Variable Rate Loan
most home loans in Australia have a variable interest rate. This is whereby the interest rate changes gradually. This means that you loan payments will increase with the rise of interest rates and decrease when the interest rates fall. To avoid extra payments, you can choose to make payments when the interest rates are lower. This type of loan also allows you to pay your mortgage before the due date without any extra payments. This loan is effective for first time home buyers as it is a cheap option. However, this type can cause you trouble as you are planning your budget because payments can change over time.
2. Introductory Loan
This is a type of loan that has a fixed interest rate at the beginning of your borrowing period, usually 12 months, but it changes to a variable rate after this period. The first period of borrowing usually has the lowest interest rate available in the market. You can use the extra money saved to pay a part of your principal. However, after the 12 months grace period, you may find that your interest rate is the highest in the market. Ensure you do thorough research about your lender to avoid inconveniences at the end of the honeymoon period.
3. Interest Only Loan
This is a type of loan where you are required to pay interest only on your principal amount. The reimbursement amount is always low as compared to normal loans. It is only available on the first 5 years of your borrowing period. If you are looking forward to saving money and reinvesting it, then this type of loan is a better choice for you. The moment your interest only period ends, you will be required to make extra payments. It is advisable to always calculate the overall amount before borrowing.
4. Underwriter Loan
This is a type of loan where a home owner finds another home owner to offer a part of their assets as collateral to assure the lender of the safety of their money. This way, the first-time home owner will only require a small amount of deposit and helps you get better conditions from your lender. This loan is best suited for first time home buyers struggling to look for a deposit. Your guarantor must be a reliable and trustworthy person. However, you may end up paying a higher interest rate.
5. Substitute Documentation Loan
A substitute documentation loan may also be referred to as a low doc loan. This type of loan is borrowers who were unable to provide proper documentations of a normal loan. In this type of loan, the lender asks for different documentations that are suitable for borrowing apart from the obvious documents. Not many banks or lenders offer this type of loan and therefore there is a high probability of you paying a high interest. This type of loan allows those without an income history or preferred documentations a chance to venture into property investment.
6. Impairment Home Loans
This type of loan offers people with disability who find it tough to get a home loan an opportunity to become investors and own homes. This loan has special terms of agreement. People with disability who have an excellent financial history without a consistent source of income but have a great credit score can apply for this loan. Lenders however, treat this loan just like a normal loan considering there is disability pension.
7. Nonconforming Loan
This type of loan is best for people who are not eligible for a regular loan due to their poor credit score or non-consistent loan payments. This loan requires you to have a good savings report to assure your lender that you can regularly make repayments as agreed upon. This is a great way for those with poor credit scores to consider investing in property development or own a home.
8. Fixed Rate Home Loan
Unlike a variable rate home loan, the interest rate in this type of loan is constant. This means that the interest you paid during the first repayment will be the same until you finish the fixed period which is usually 5 years in Australia. You can easily calculate your costings as you already know the interest to expect. This loan is best suited to those who desire consistency in their payments.
9. Split Rate Home Loan
This type of loan has both fixed and variable interest rates included. The fixed rate part of the loan stays unaffected as the variable rate rises and falls. The percentage to be addressed to either of the rates is your decision to make. You can make extra payments in this loan.
Classification Of Home Loans for Existing Home Owners
1. Recapitalize loan
This is the type of loan where the borrower pays their existing loan and decides to borrow another type of loan. You may for instance decide to move from a low doc to a variable rate loan. Your lender will revisit the terms and conditions of your previous and maybe shorten your loan term. You have high chances of getting a better deal as your portfolio is improving. You have to submit a new application for the loan you want to move to.
2. Bridging loan
This is a type of loan that enables you to buy a new home as you wait to sell the old one. This is a short-term loan that has a limited period of up to 6 months. People who have an urgent need for money and cannot wait to sell their existing property can apply for this loan. This type of loan can be more expensive than normal loans, in case your house does not sell within 6 months.
Conclusion
There is a variety of home loans available in Australia and each of them has its pros and cons. Lenders are always ready to serve you in the best way possible to ensure you get your new home or renovate your existing one. It is good to always try and evaluate different lenders before making a conclusion. You also need to evaluate your preferences and calculate your expected amount before deciding to take up a loan. We hope this article will be helpful on your journey to buying a home and applying for you home loan.
FAQS
1. What does FHA loan mean?
An FHA loan is a loan offered by the government, purposely for borrowers who are unable to borrow from private lenders.
2. What does a mortgage refer to in Australia?
A mortgage is a loan used to fund an investment or home. It is borrowed in order to purchase a home and does not require you to pay the total amount on the spot.
3. How much deposit can I pay for a house in Australia?
The minimum amount of deposit you can pay for a home is 10%. You can however pay more than that if you are in a position to.
4. How hard is it to get a home loan in Australia?
With a good credit score and a reliable job, you can easily get a home loan.
5. What is the time limit of a home loan?
Most home loans are limited to 20 to 30 years. This however depends on your lender and the property value.