When you are looking to buy a home in Australia, finding the right home loan can be overwhelming. Which home loan product is right for you and your circumstances? What features do you need? Is variable or fixed rate better?

The good news is you don’t have to figure this out on your own. At Lending Loop, our expert team can help you to find the right home loan, with the best rates, features and fees, for your circumstances.

Types of home loans

At a glance, it can seem like there as many different types of home loans as there are borrowers. But we can boil that down to the five main types of home loans currently available in Australia:

1. Variable home loan
2. Fixed home loan
3. Split home loan
4. Low doc home loan
5. Guarantor home loan

Variable home loan

A variable interest rate loan is subject to change (variation) over time. A lending institution may decide to vary its home loan interest rate in response to changes in market conditions. One market condition may be movement in the Reserve Bank of Australia’s cash rate (which is currently 3.35%).

This variation in a home loan interest rate means that the repayment amount on a variable home loan can increase or decrease between weekly, fortnightly, monthly or quarterly payment periods.

The disadvantage of a variable home loan is this variation in repayment amounts, particularly at a time when interest rates are rising. Though this becomes an advantage when interest rates are falling.

An advantage of variable home loan is that they are flexible. Borrowers are able to make extra home loan repayments without fees. Additionally, variable home loans usually offer benefits such as offset accounts and redraw facilities during the life of the loan.

Fixed home loan

The interest rate on a fixed rate home loan is set, or ‘fixed’, at the lending institution’s interest rate at the time the mortgage is settled. This rate remains in place for a specified period, usually three to five years. This means that for the fixed rate period of the loan, you will know precisely what your repayments will be.

When the fixed rate period expires, your loan will move to your lending institution’s variable interest rate for reverting loans for the remainder of your home loan. This rate may be higher than other rates offered by that lender.

The main advantage of a fixed rate home loan is certainty in your repayment amounts, across the fixed rate period. This means you will be able to budget for the specific amount.

The main disadvantages of a fixed rate home loan are:

• Fewer benefits with the home loan product, such as offset accounts and redraw facilities.
• High ‘break cost’ fees, if you were to ‘break’ the period of your loan (e.g., to refinance to a different home loan product, prior to the end of the fixed rate period).
• When you revert to the variable rate this rate may be higher than other loans offered in the market

Split home loan

Most lending institutions offer a split home loan product. It may also be called a partially fixed interest loan or combination loan. This is a single home loan that allows borrowers to split their loan into a fixed rate amount and a variable rate amount. The borrower can choose how much of the loan is fixed, and how much is variable.

The advantage of a split home loan is that a borrower receives repayment certainty for part of their loan (with the fixed rate) and more flexible loan features (with the variable rate).

It’s worth checking with your mortgage broker to see what lending institutions will offer a split loan on their home loan products. This is definitely something we can help you with at Lending Loop.

Low doc home loan

A low doc home loan is a product suited to borrowers who are self-employed or who work on a contract basis. Being self-employed, or employed on a contract basis, may mean a borrower is not able to satisfy the standard lending institution requirement of proof of regular income or a payslip.

Lending institutions still require documentation for low doc home loans. But they’ll accept different documentation than what borrowers typically supply.

The major advantage of low doc loans is that if you are self-employed, or employed on a contract basis, you are still able to seek home loan approval.

Disadvantages of low doc home loans include:

• Not all lending institutions offer them
• A higher than usual deposit could be needed
• A higher interest rate may be charged
• Lender’s Mortgage Insurance may be needed
• There could be risk fees as part of the product

Guarantor home loan

If you don’t have a large enough deposit saved and a financially supportive family member or close person, you may consider a guarantor home loan. A guarantor home loan will name a guarantor – this is a person willing to offer the equity in their own property – as additional security against your home loan.

The effect of this is that your home loan may be approved with a smaller deposit. You may also be able to avoid having to pay Lenders’ Mortgage Insurance.

Asking someone to be a guarantor for your home loan is significant. A guarantor is ultimately responsible for the borrower’s home loan, including fees and charges. The clear advantage of a guarantor home loan is, of course, that you may be better able to obtain a home loan. The main disadvantage is that risk that your guarantor could be negatively impacted if you aren’t able to meet the financial commitments of your home loan repayments.

Questions? 

For more information about these five types of home loans – and all other types of home loans – get in touch with our expert team at Lending Loop. We can find you the best home loan product for your circumstances, from over 40 of Australia’s biggest lending institutions. Give us a call today at Lending Loop. We’re here to help.