Types of Home Loans

 

Variable, pro-pack, split, non-conforming… these loan terms can be a bit confusing to even the most experienced home buyer. To make things easier we have included a short description of the most common loan types on the Australian market.

 

Variable Rate Loans

This type of home loan is the most popular in Australia. Repayments are linked to the interest rate of your lender and therefore your repayments will vary as interest rates fluctuate. It is important to budget for fluctuations because even the smallest change can have a big impact on the amount and length of your loan.

The two major types are basic and standard variable rate loans. Basic home loans are essentially your no-frills loan types and come with less features than your standard. Less features can mean a lower rate, but it is important to note whether the features your sacrificing could actually help you pay off your loan quicker.

Fixed Loans

Fixed home loans do not refer to a fixed rate for the length of the loan but instead it usually refers to a set period of between one and five years. Choosing a fixed rate home loan makes it easier to include repayments into your budget and protects you from climbing interest rates

However, the obvious downside is that if interest rates fall then you could find yourself paying more than if you were on a variable rate home loan. Many fixed home loans also have ‘break charges’ that will be incurred if you switch back to a variable loan or refinance during the fixed term.

Split Loans

As the name suggest many lenders will allow you to split your loan between a fixed and variable rate. Usually you will fix one part of the loan and the remaining term will have a variable rate. This gives you some added protection from rate fluctuations whilst allowing you to benefit from cuts. Most lenders provide flexible options when setting the fixed/variable portion of your loan.

Packaged Loans

These loans are also marketed as Professional Packages or Pro Loans and refers to loans with other features and discounts included within the entire package. They are generally offered to borrowers whose loans are greater than $150,000 (although this figure varies) and were originally designed for high income earners in specific professions (hence the name).

Common features and discounts offered in these packaged loans include:

  • Credit cards with no annual fees
  • Interest rate discounts
  • Additional no fee accounts such as Offset accounts
  • Fee waivers
  • Reduced fees for timely repayments

Non-Conforming Loans

Also known as ‘low-document’ loans, this a broad term for loans offered to individuals who fall outside of traditional lender’s strict guidelines. You may be deemed a non-conforming borrower if you are over 55, have bad credit, are self-employed or you are taking a home loan out that’s worth over 90% of your property’s value. As these loans are offered to individuals who may be deemed a greater credit risk their rates generally sit about 1% higher than the market rate. They can be either fixed or variable rate loans.

Other types

  • Bridging loans
  • Line of credit
  • Offset account