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Home Loans, Specialists in Australian Mortgages.

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Home Loan Types

There's plenty of different types of home loan products on the market. So, before deciding on a product, you need to have a basic understanding of the most common loan types. Knowing the professionals and cons of the different types of loans will help you pick the one that most closely fits your needs.

Not surprisingly, there is not a one-size-fits-all product. Your Zar Mortgage Broker will advise you on the different loan types, help you find the loan type that is most appropriate for you, and will take care of all of the paperwork and application requirements.

Variable Rate Home Loan

Basic Variable Rate Home Loan

Standard Variable Rate Home Loan

Fixed Rate Home Loan

Split Rate Home Loan

Introductory and Honeymoon Home Loan

Interest Only Home Loan

Low Doc and No Doc Home Loan

Packaged or Professional Package Home Loan

Variable Rate Home Loan

Variable rate loans often provide additional flexibility and are the most popular type of home loan in Australia. The rate of interest is variable and, therefore, fluctuates with the Reserve Bank of Australia's movement and the cost of the financial institution sourcing money to lend. Variable rates are usually broken in to five loan types by financial institutions: basic and standard.

Basic Variable Rate Home Loan

The basic variable rate only covers the basic home loan features. With some lenders you will have access to features such as redraw facilities, and additional repayments, although you may not have access to an offset facility; however, this usually means the rate of interest is slightly lower than other loan types. Different lenders offer varying facilities with the basic variable home loan product, so you ought to contact your Loans Home Consultant to speak about the choices you need to make definite a basic variable mortgage is suitable for you.

Pros – If the rate of interest stays the same or decreases in the coursework of the term of the loan, or if you are only planning on keeping the property for a short timeframe, you can economize. However, this strategy depends on your ability to sell the property.

Cons – These types of loans are unpredictable and there is the risk of rate increases, meaning this will increase the amount of your every month repayment. It is vital that you budget for the likelihood of higher rates of interest.

Standard Variable Rate Home Loan

The standard variable rate is historically slightly higher than the basic; however, you get additional features such as an offset account, redraw facility, repayment frequency flexibility, portability and the choice to pay in advance.

Pros – If the rate of interest stays the same or decreases in the coursework of the term of the loan, or if you are only planning on keeping the property for a short timeframe, you can economize. However, this strategy depends on your ability to sell the property.

Cons – These types of loans are unpredictable and there is the risk of rate increases, meaning this will increase the amount of your every month repayment. It is vital that you budget for the likelihood of higher rates of interest.

Fixed Rate Home Loan

Fixed rate loans have a fixed or unchanged rate of interest for 1 to 15 years. In Australia, these loan types normally are not as flexible as variable rate loans; however, there's some lenders who offer the same flexibility (offset, redraw, additional repayments, etc.). Speak along with your Loans Home Consultant to make definite the loan includes all the features you need.

Pros – Fixed rate loans are predictable and there's no surprises—allowing you to maintain the household budget in the coursework of the fixed period.

Cons – If the rates of interest fall, with this type of loan, you could finish up paying more. It may be feasible to refinance, although lenders usually charge penalty fees.

Split Rate Home Loan

For some, split rate loans are “the best of both worlds.” With these loan types, you choose how much of your loan will be “fixed” and how much will be “variable” rate.

Pros – Never knowing for definite what rates of interest will do, split rate loans protect both portions of the mortgage. If rates of interest rise, you are protected on the fixed rate portion—if there is a reduction in rates of interest, you are protected on the variable portion. And, you may make additional repayments on the variable portion of the loan.

Cons – These loan types may include charges on both the fixed rate and variable rate, such as setup fees, account fees and discharge fees. On the fixed rate portion of the loan, you may be penalised for paying off your loan early and for making higher repayments.

Introductory or Honeymoon Home Loan

Introductory or Honeymoon home loans give a reduced rate of interest for the first 6 to 12 months. These types of loans are most popular with first home buyers to help offset the other expenses that accompany a brand spanking new home. After this period expires, the loan reverts to the lender's fixed or variable product and the rate of interest usually reverts to the higher rate.

Pros – In the coursework of the introductory period, the reduced repayments can help offset other expenses that accompany a brand spanking new property. Although the giant majority of honeymoon loans revert to the higher rate after the introductory period, this is not always the case. Check along with your Zar Mortgage Broker for more information on available honeymoon loans.

Cons – These loan types may have exclusions or restrictions. Plenty of lenders limit the availability of features, such as redraw facilities, repayments, etc. In some cases, this can mean less flexibility over the term of the loan.

Interest Only Home Loan

Interest only loans are popular for investors. The repayments of interest only loans will be lower than other ordinary loan types because you only pay the interest charges each month—the principal of the loan is paid only when convenient.

Pros – Investors can benefit from interest only loans, as these loan types let you secure the property with minimal money. They are as well as a lovely option if your income fluctuates every month, or in the event you will make much more money in the future. First home buyers may benefit from these loan types in the event that they expect to upgrade from their starter home to a bigger home in the near future.

Cons – The issue with interest only loans is that the principal must be paid back at some point. When it does, the every month repayment will skyrocket. In addition, these loan types pose a higher risk for the lender, therefore, usually over higher rates of interest. Additionally, your level of debt won't fall for the life of the loan. Interest only loans are intended as a short-term solution to your financing needs (about 5 years at the most); and if things do not turn out as expected (you lose your job, get hurt or injured, or property values decrease), these loan types could cost you your home and ruin your financial well-being.

Low Doc and No Doc Home Loan

Low Doc and No Doc loans are increasingly popular in Australia, for the self-employed and contractors. As the name implies, you need less documentation to take out the loan (proof of income and other debts, etc.). Since there's so plenty of variations on these loan types, it is best to speak along with your Zar Mortgage Broker when shopping for Low Doc and No Doc loans. Your mortgage broker will be able to sift through available options to find loan products that best suit your needs.

Pros – These loan types make it simpler if your income fluctuates, is difficult to confirm, or you don't have the time to collect all the necessary documentation. Less paperwork means faster processing and approval. Also, low doc and no doc loans are helpful to the rich who prefer not to reveal their total income.

Cons – The cost of avoiding the financial microscope usually means a higher rate of interest and/or additional fees to compensate for the lender's perceived added risk. The lender may also limit how much you can borrow (60% to 80% of the worth of the property). Although it is less work and usually simpler to qualify for these types of loans, in the long run it is usually to your advantage to apply for a full doc loan.

Packaged or Professional Package Home Loan

In the event you are borrowing $250,000 or more, you may qualify for a reduced rate of interest through a Packaged or Professional Package Home Loan. These loan types offer a range of discounts and special offerings on loan products and bank accounts in exchange for an annual fee. Discounts are usually determined by the amount of the loan—the higher the loan amount, the higher the rate of interest discount. Some lenders offer discounts off equity, fixed and standard variable loans with fixed rate discounts ranging from 0% to 0.25%, as well as a variable and equity rate discounts of 0.5% to 1%.

Pros – In addition to the discounted rate of interest, these loan types may include other benefits: reduced mortgage establishment and every month fees, fee-free banking on transactional accounts, annual fee waived on some credit cards, discounts on insurance products, future loans and other bank services.

Cons – Normally, these loan types incur a three-figure annual fee (about $300 to $400). In the event you don't need or don't utilise the other services that are included in the package, the annual fee may cost you over the interest savings, as the loan balance reduces. In addition, some packaged home loans need that you open a transaction account and take out a credit card with the lender

 

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