If you’re planning to buy a house, you’ll likely need a home loan to finance it. But did you know there are multiple home loan products on the market, and what works for your friend might not be the right choice for you?
Even though mortgage products might look similar, they can be structured differently, which can significantly impact your cash flow and the ability to manage your repayments.
Here’s a rundown of some popular home loan options to help you make an informed choice.
- Owner-occupied and investor home loans
The type of home loan you’ll need depends upon the purpose you’re going to use the property for. If you’re buying a house to live in – you’ll require an owner-occupied home loan. On the other hand, if you’re buying a property as an investment to earn rental income, you’ll need to apply for an investor loan.
Owner-occupied loans are typically principal and interest loans. You make regular repayments on the principal (or the borrowed amount) in addition to paying interest each month to gradually pay down the loan over 25-30 years.
Investment loans, on the other hand, are often interest-only loans. If you take out an interest-only loan, your repayments will only cover the interest on the principal during the initial period (which could be up to 5 years in some cases). While this can help you maximise your cash flow as an investor, remember that your debt won’t reduce during the interest-only period, and you won’t build any equity in the house unless its value appreciates. Your repayments will also jump significantly at the end of the interest-only period as you need to pay off the debt within a smaller timeframe.
Lenders usually consider investors as a riskier type of borrower than owner-occupiers, which is why the interest rate and fees on investor loans are generally higher than owner-occupied loans.
- Fixed, variable and split interest rate loans
Whether you’re buying a house for yourself, or as an investment, you’ll need to select the type of interest you want to pay on your mortgage. If you choose a variable rate, the interest you pay will depend on the official cash rate set by the RBA, as well as any interest rate changes made by your lender. You might be able to save money on interest charges during low interest rate periods, but there’s always the possibility of an interest rate hike in the future.
Fixed rate home loans allow you to ‘fix’ your interest rate for a specified period, up to 5 years. During this time, your interest rate will not change regardless of any changes in the market. You might prefer a fixed rate because it’s easier to plan your budget with fixed repayments. However, fixed rate home loans are usually less flexible than variable rate loans, and you might have to pay a fee if you decide to refinance a fixed-rate loan during the ‘fixed’ period.
It’s also possible to fix a portion of your loan and pay a variable interest rate on the remaining part. It might help to speak with a broker to understand the pros and cons of each option before deciding what’s best for you.
- Low deposit home loans
Lenders usually require you to pay 20 per cent of the property’s value upfront to qualify for a home loan. However, you might be eligible for a low deposit home loan with some lenders if you have good credit and adequate income to service the loan. Still, you’ll need at least 5 per cent of the property’s value in genuine savings, and to pay for Lenders Mortgage Insurance (LMI) to qualify.
You could also consider a guarantor home loan to avoid paying LMI when borrowing with a low deposit, if your parents (or another family member) agree to guarantee your mortgage with their own property.
- Low doc home loans
Self-employed borrowers and freelancers might find it hard to qualify for a traditional home loan because they have variable income and cannot provide standard proof of income, such as pay slips, to support their mortgage application. A low doc loan is an alternative for borrowers with non-standard income. Such loans require minimal paperwork, making it easier to qualify for a mortgage, but they usually come with a higher-than-average interest rate.
- Bad credit home loans
Life is all about second chances. If you’ve had bad credit in the past but your finances are back on track, a bad credit home loan could help you purchase your dream home, if you’re able to afford it.
Bad credit home loans are for people with a poor credit history that are now able to service a home loan. However, these home loans are only offered by specialist lenders, and the rate of interest is usually higher than the market average. The good thing is you can improve your credit score by making regular repayments on your home loan, and eventually refinance to a traditional home loan with a lower interest rate.
If you’re considering a bad credit home loan, make sure you only borrow as much as you can afford, as missed payments are only going to worsen your credit score. You could also risk losing your home if you default on the mortgage.
- Construction home loans
If you’re building your home from scratch or planning major renovation work, a construction loan could help you save money on interest charges. Construction loans allow gradual withdrawals to fund progressive construction stages, leading to lower repayments that help manage cash flow. Additionally, you’re only charged interest on the amount that has been used up until that point, leading to lower interest costs.
- Bridging home loans
If you’ve decided to switch homes, you might have to wait to sell your current home before you can purchase a new one. But what if you find a deal that’s too good to resist, or you need to move to your new place sooner? A bridging loan can help you ‘bridge’ this gap by providing you money for the new house while you’re still trying to sell your current place. Bridging loans generally last a year, during which you’ll continue repaying your original mortgage and only pay interest on the bridging loan. Once your home is sold, the sale proceeds are used to pay off the original mortgage, and you’ll then start paying both interest and principal repayments for the remaining debt.
Overall, there’s no single mortgage product that’s best for everyone. You need to find a product that matches your requirements and financial goals. Speaking with a mortgage broker can help you understand your options and pick a home loan that’s tailored to your specific needs and goals.
