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Types of Home Loans in Australia

When it comes to the big decisions in property investing, most people consider suburb and property selection as the greatest conundrums.

But choosing the right home loan is another really important decision to make as a potential investor.

Knowing how to choose the right home loan could be the difference between success or failure as an investor.

The difficulty in these decisions stems from the overwhelming variety of product choice available from various lenders.

We’re going to go through some of the main types of home loans, to help guide your decision-making process when the time comes.

Why it’s so important to make the right call

Before we get into the different types of home loans in Australia, it’s important to understand why this decision matters.

The different types of home loans are usually designed with a particular consumer or borrower in mind.

There may be some home loans that are perfect for those looking to purchase new property as opposed to established.

Some home loans are better suited for those looking to minimise expenses, while others might suit a borrower looking to build a property portfolio as fast as possible.

Having a good understanding of the different benefits and conditions associated with the type of home loan is really important, as it will help minimise any risk when it comes to investing.

It’s also important to know what type of borrower you are. This includes having a good understanding of your strategy, goals and resources when it comes to property investing.

This way, you can know what home loan is right for you.

The different types of home loans

There are generally eight types of home loans available for borrowers in Australia.

1. Fixed and variable home loans

The first, and most commonly recognised type of home loan is the fixed and variable home loans.

Although technically two separate home loans, this term refers to the two choices available when calculating interest rates on the home loan.

A variable interest rate refers to a type of interest rate that varies depending on what the market is doing at the time. Rates can vary month-to-month, and while it can offer you rate savings, it can also be pretty unpredictable, making it difficult to forecast expenses.

A fixed home loan is the opposite, where the interest rate remains set at a certain percentage for a period of time. This offers a more stable and predictable experience for that period (usually around 5 years).

For advice on how to pay less interest on your home loan, check out the video below:

2. Interest-only loan

This type of home loan means you will only pay back the interest accrued on the loan for a period of time.

Only paying the home loan interest rate can help lower your monthly repayments for up to 5 years before you return to a principal and interest loan (where you’re paying back the interest and original loan amount).

However, while it may keep repayments low temporarily, it can slow down progress when it comes to building equity in your home and means you’ll end up paying more over the life of the loan.

3. Non-conforming home loan

This home loan is an option that helps borrowers with specific financial circumstances.

It is often used by borrowers with an irregular source of income or imperfect credit history.

Often interest rates are higher for borrowers looking to secure a non-conforming home loan, as you’re seen as a greater risk by the lender.

4. Low documentation home loan

A low documentation home loan is another type of loan for those with a specific set of circumstances.

It is designed for investors who don’t have a standard proof of income, and can;t show payslips or consistent tax returns.

However, this type of home loan still allows that person to secure a loan.

Once again, this usually incurs a higher interest rate. You can usually only borrow up to 80% of the property’s value, and lender options are quite limited.

5. Bridging home loan

A bridging home loan is a type of loan that is used by investors transitioning between selling a property and buying another.

This involves the lender taking over that existing property’s mortgage and finance.

The outstanding amount still to be paid on that property, the purchase price of the new property and any costs all form part of the total amount borrowed.

Once that existing property has been sold, proceeds will then lower this debt.

Whatever is not covered by the sale of the property forms part of the new, traditional home loan.

This can be a great option for someone looking to sell one property and purchase another and minimise the financial burden while doing so.

6. Line of credit home loan

This is a type of home loan that provides investors with an opportunity to borrow against the equity in their home.

The equity in your home becomes a line of credit, with the amount of money that can be borrowed determined by the credit limit set by the lender.

7. Construction home loan

Designed for investors building a new property or renovating, this involves a loan where progress payments are made at various stages of construction.

Construction loans have interest only payments during this construction period, meaning repayments are lower during this time.

8. Self-employed home loans

This type of home loan is available for self-employed investors.

Whether you’re a freelance, sole trader or carry out some other type of self-employment, this type of home loan provides you with an opportunity to still own a home.

Despite being specifically designed for self-employed borrowers, which requires a bit of additional paperwork to your lender, the loan essentially allows access to all the main types of home loans (i.e. variable and fixed-rate loans, line of credit loans, interest only loans, etc.).

Which home loan is right for me?

As you can see, these different types of mortgage loans suit very different circumstances and will apply to a specific type of person.

If you’re not planning on construction or renovating an investment property, a construction home loan won’t be right for you.

If you’re looking for consistency and predictability when it comes to property expenses, a fixed rate will be a better alternative to a variable interest rate.

Someone looking to lower their initial payments may go with an interest-only home loan.

And an investor who still wants to buy property but has an imperfect credit history may have no choice but to select a non-conforming loan.

That’s why it’s really important to take time and develop your specific strategy – to determine goals and limits.

There is no one-size-fits-all approach when it comes to property investing!

PK Gupta
Published: 12 Jan 2024


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