Confused about your first mortgage, or looking to change to a different mortgage product? Our introduction to common mortgage and home loan types used in Australia will help you.
If you choose a variable mortgage, the interest rate charged moves up or down in line with the official cash rates set by the Reserve Bank of Australia. So, if they go up, so do your required repayments, but if they fall, then you can pay less each month.
A standard variable home loan offers you flexibility, with many offering features such as redraw facilities and cheque books, and the ability to make lump sum payments or transfer your loan to another property in the future.
A basic variable home loan is generally about 1 per cent cheaper, but it’s the “low cost, no frills” version with few added services.
With a fixed rate mortgage your interest rate, and therefore your repayments, stay the same, no matter what changes the Reserve Bank makes to the official cash rates. If you think interest rates will rise or you prefer to have some certainty about your repayments over the term of the loan, a fixed loan may be more suitable. Lenders will normally offer a fixed rate for periods of up to five years.
Remember, though, if you lock into a fixed rate mortgage and interest rates fall, you’ll miss out on the lower rate. There may also be some restrictions during the fixed rate period. You might not be able to make extra repayments and penalties may apply for early repayment or exit.
Combination or Split Loans
A combination loan offers borrowers the ability to set part of their loan as a variable rate loan and the other part as a fixed-rate loan. If you’re not sure which direction interest rates will go, this is like having a bet each way.
Many lenders offer so-called honeymoon rates during the early months of your mortgage. The interest rates offered can be significantly lower than the prevailing variable interest rate, but will only apply for a limited time – usually between six and twelve months. After the introductory period, rates usually revert to the standard rate at the time.
Home Equity Loan or Line of Credit Mortgage
Lenders structure home equity loans differently, but basically, it gives you access to the equity that you have already paid off. In effect, any payment you make can be drawn back out as long as you are able to pay the interest charges. This type of loan may be useful for investors or businesses.
Transactional Account or All-In-One Loan
An all-in-one loan is normally set up as a complete transactional account with your mortgage, savings and cheque accounts combined. All your income and cash deposits are paid into this account, and this reduces your loan balance. A credit card is often linked to the account, and monthly payments are drawn from the transactional account, so you can use interest-free credit card periods to let your income reduce your interest costs.
Mortgage Offset Account
If you have a mortgage offset account, your loan account is linked to a regular savings account where your salary is deposited. While money sits in your savings account, it is offset against your loan and no interest is charged on that amount.
Reverse Mortgage or Equity Release
A reverse mortgage product may appeal to retirees who have paid off their home – you have a lot of assets, but low income. The lender will loan you a lump sum, or provide a monthly payment, and in return take a stake in the home equivalent to the amount loaned plus interest. The lender generally claims their stake later when the property is sold.
With a shared equity loan, the lender will offer a discount interest rate (or no interest at all) on a portion of the loan value in exchange for a share in the capital appreciation of the property value. This means you as a home buyer recieve a lower interest rate and lower repayments, making it easier to enter the market.
This style of product was first offered by Rismark International and is also known as an Equity Finance Mortgage. Other variants include the Shared Appreciation Mortgage and the First Start Shared Equity Home Loan Scheme introduced by the Western Australian government.
Bridging finance has long been seen as the expensive answer to the dilemma of having bought one home before you have sold your existing property. Most banks have some form of bridging finance to tide you over until your original home sells.
Deposit Guarantee Bond
Deposit bonds are commonly used to raise a deposit for a new property when all your capital is tied up in your current property or other assets. Similar to Bridging Finance, the terms are usually short – up to 48 months.
Low-Doc or No-Doc Loans
A low-doc or no-doc loan – meaning you need little or no documentation – is ideally suited for investors or self-employed borrowers who may not have, or want to share, income records. No tax returns or financial reports are generally required, but a higher interest rate and/or fees may be charged.