This page relates to the Australian home loan market. If you are not in Australia, by all means have a read however we suggest you do your own research. The best way is to go to a web site that compares all the different types of loans out there.

Key in words like mortgages, home loans, loan comparison into a search engine like google and you should find some sites that research into the different loans. They also should describe the difference between the types of loans.

Variable  

This is the most popular type of loan. As the name suggests the interest rate can vary over time, depending on market forces. Most banks base their variable rate on the Reserve Bank official rate and their variable rate doesn't change unless there is an official rate change by the Reserve Bank.    

This loan can offer many features such as the ability to make extra repayments, redraw, transfer to a fixed rate, substitute security etc. The list of features can be long in some cases. What you need to work out is what features do you need. The interest rates on this loan are usually about 0.50% higher than the basic loans on offer.

Basic

Many banks now offer a no frills basic home loan that has lower fees and a lower rate. It is well worth researching these loans because often you don't need the extra features of the variable rate loans and over the term of the loan you could save quite a lot.

Some however don't offer features that can be important like fortnightly repayments or redraw, so ensure the features you need are what you get.

To find out about different types of loans and providers go to:

http://infochoice.com.au/

Introductory

Sometimes referred to as honeymoon rate loans, the customer is offered a lower interest rate for a period between 6 months and 1 year. When interest rates are at 8%, the introductory rate might be 6%. The disadvantage is that once the honeymoon period is over your interest rate increases to the standard variable rate and repayments will jump. If you start paying the higher repayment amount (as if you were paying at the standard variable rate from the start) you will reduce the loan faster. So ask the bank what the repayments would be at the variable rate and pay that amount or more from your first instalment. Just watch for any hidden fees on this type of loan.

The basic home loan will generally be cheaper over the long term. So again have a look at the features and get what you need. Also these loans usually have penalties if paying out early. This can be anytime in the 1st five years, however check as conditions vary between loans

Fixed

This type of loan allows you to fix the interest rate for a period of time, usually from one to five years. After the given fixed period the loan usually may convert to the variable rate. The advantage is that your repayments will remain the same regardless of interest rate changes for the fixed term. So if interest rates rise, you win, however, if interest rates fall, you won't receive any reduction in your interest rate.

In most cases you are allowed to make extra repayments of no more than $5,000 per annum which you can't redraw. You will also be penalised in most cases if you pay out the loan during the fixed rate period. It is crucial that you don't fix it for a period longer than you need.

Fixed rate loans are particularly worth considering if you are on a strict budget and can't afford to take the risk of interest rate rises.

Line of credit

Beware danger - only for the most disciplined! This type of loan, sometimes called a home equity loan, is much like an overdraft, secured by your home. You can redraw against the line of credit up to the original amount borrowed. If used correctly, such as for investing, they can greatly assist in your wealth creation. Many people use them to pay off existing consumer debt, buy luxuries, or pay for holidays. If used in this way, you will most likely end up making your financial situation worse!

Do you want to be paying your holiday off for 25 years?   

Offset Accounts

One of the selling points for the variable and fixed rate loans is often the offset account. Offset accounts come in a number of different forms, however the features are usually the same. These are balances in an account or accounts which don't earn any interest in their own right however they offset the interest on your loan. This sounds great If that $5,000 you are holding for an emergency reduced the interest rate on your home loan by $5,000 at the normal home loan interest rate.

The reality is often different. For many people the only reason to have the normal standard variable is to take advantage of the offset account. On a $75,000 loan this is costing $375 per year as compared to the interest rate on a basic type loan. Offsets are OK if you have $20,000 + however most of us don't. Some offsets don't pay on the 1st $2,000. Do your homework! A basic loan with a redraw facility may be a better option.

Loyalty Home Loans

At present this feature is not being offered by the financial institutions. However the slow down in property values will see minimal growth in lending figures. To obtain growth in Home Loan balances the banks will be offering more attractive deals to win clients from other lenders. This will also see a greater focus on retaining existing clients. The recent trend in credit card loyalty programs will most likely move across to the Home Loan market.

This is long overdue particularly if it relates to reduction in interest rates for loyal clients.

No Deposit Loans

Often called 100% home loans enabling purchasers with no deposit to buy a home. Of course the repayments are higher because they are borrowing more as well as having mortgage insurance which further increases the repayments. Purchase costs including stamp duty still need to be found so have a look at our calculator to ensure you know how much you need.

For some families this is their only option as they struggle to pay rent and save for a deposit. The problem that can arise is if interest rates rise, income reduces or an abnormal expense pops up like medical bills causing problems in meeting the large repayments. Miss repayments in the 1st year or so and you may find yourself owing more than the home is worth! The desire to budget hard to meet loan repayments can evaporate if the loan increases past the home value.

For some people who are on high incomes but for some reason haven't been able to save, this type of loan is worth considering. They will be able to pay off the loan much faster quickly increasing equity.

If you aren't able to come up with the purchase costs then some financial institutions will lend 105% of the purchase price! Talk about being mortgaged to the hilt! Again this is definately not for everyone.

Reverse Mortgages

These are for people over 60 years of age who have large equity in their home allowing them to take advantage of their main asset to provide cash flow. No repayments are required during the loan term with the loan being repaid if the house is sold or the borrowers die. This loan allows the home owner to purchase goods, make home improvements, go on a holiday or even purchase a car which they couldn't afford to do because of lack of income. The interest rate is about 1% higher than the standard variable rate.

This product is only applicable for a small portion of retirees due to the compounding nature of the loan. Usually those living in the inner suburbs of our capital cities who have homes worth much more than the average suburban home. Although some have used this product to borrow small amounts like $20,000 for home improvements.

The main question asked about these type of loans is what happens if the loan balance is higher than the value of the home? Most of the loans offered in Australia have a ""no negative equity guarantee"" which allows the borrower to stay in the home even if the loan balance is higher than the house value. The Banks involved generally have strict lending criteria and have a maximum lending ratio of between 10-45 % of the value of the home.

This loan reduces the value of the estate so it is worthwhile ensuring all potential beneficiaries are aware of the loan. One other aspect to consider before borrowing is that it may affect age pension entitlements. Contact Centrelink to find out more.

Family Pledge Style Loans

Another option offered is family pledge style loans. Usually other family members act as guarantors for all or part of the loan.

This usually occurs when the borrower doesn't have sufficient deposit to meet the lenders requirements. In most cases mum & dad will provide their house as additional security. By providing this security they must understand they are at risk of losing their house if son/daughter defaults. Now this rarely occurs as the son's/daughter's home would usually be sold first leaving a smaller amount owing. From this the parents usually would make repayments on the residual ensuring their home is safe.

One particularly important item is house insurance. Ensure both houses are fully insured and insist on being given proof of insurance each year if you are providing additional security.

For the parents when the loan is being discussed it is very important to negotiate an amount they are liable for. Usually financial institutions are comfortable lending 80% against the value of the prime security ie childrens house. Therefore it is not unreasonable as guarantors for the parents to stipulate they are liable for a fixed amount. On a $200,000 property with loan amount being $200,000 you could request the guarantee limits you to no more than $50,000. This is 20% plus a margin which is fair.

If the value of the childrens house has increased in value and loan reduced, you may be able to have your house released as security. Now the current amount owed must be less than 80% of the value of the home for this to be considered. And by value we mean official valuation not real estate agents estimate. If you believe you are in this situation request your home be released.

As for the type of home loan ie fixed, variable etc they are no different to any other application. The security is the only difference.

Non-conforming lenders

These generally target 2 types of clients. They are those with a poor history of borrowing and those who are unable to prove that they can repay the loan. This 2nd category often includes the self employed.

Interest rates are usually higher and a sliding scale applies with higher risk paying a higher interest rate. There is usually an exit fee which often is around 4%.

For some people this may be their only option. However it is essential to check all loan conditions so that you know what you are getting yourself in for.

It is interesting to note that the Australian Taxation Office is now heavily targeting people with this type of loan. They are investigating those who say there income is a certain amount yet can't prove it. The A.T.O. is using this data to start investigations and have been very successful  in obtaining more taxes.

This is last resort lending!

Comparison Rates

Use a comparison rate to compare loans between different lenders. A comparison rate is an information sheet that allows prospective home loan borrowers to check the real cost of a home loan. It shows the comparison rate as a single percentage figure based on the interest rate plus any fees and charges relating to the loan. For example, the lender's advertised interest rate may be 7.50% however the comparison rate may be 7.90%.

Always make sure when comparing comparison rates from different lenders that the loan terms being compared are the same.