25 Sep The different types of home loans explained.
If you’re thinking about owning your own home, it’s almost a given that you’ll also be in the market for a loan to assist the home buying (or building) endeavour.
Taking out a home loan (also known as a mortgage), is a necessary aspect of life for most people looking to become a homeowner. For first home buyers, understanding home loans and all the options available is quite possibly the most overwhelming concept to get your head around.
There are generally two avenues you can go through when looking to own property, you can either buy an existing home or you can build one (brand new).
If you will be purchasing an existing home, the loan you apply for is a general home loan
For those opting to build a brand-new home, you will apply for what is known as a construction home loan. A construction loan has a different loan structure to a general home loan. (I will explain the difference below)
What is a home loan?
In its simplest form, a home loan is a loan that is advanced to you by a bank (or lender), that qualifies you to buy a house. Since Australians are unlikely to afford the high cost of buying a home upfront, you will need to apply for a loan. The loan value issued to you is based on your financial position, your credit history, your income and any other factors that may influence your ability to make repayments.
The loan – which you will then pay off over an extended period of time (usually 25 or 30 years) is secured against your property. What this means is that, if at any time you are unable to consistently make your loan repayments, your lender will require you to sell the property to settle the debt.
Factors that influence what the loan will cost you is fundamentally based on three things;
- Principal – this is amount that you borrow
- Interest – this is how much you pay to borrow the money. Interest is calculated on the outstanding amount
- Fees – these fees can vary depending on the lender you choose
In this article we will explain both the regular home loan and the construction home loan.
What are the different types of homes loans
To decide which type of home loan is best suited to your circumstances, it’s important that you better understand how each works. There are five common home loan types available to Australians.
Variable Rate Home Loan – Is a loan in which the interest rate charged will change as the market interest rate changes. This means that your payments will vary as well.
Fixed-Rate Home Loan – As the name suggests, with this home loan offers a fixed (locked in) interest rate for a specific period. During the “fixed” period which can be from one to ten years (depending on the lender), your interest rate and your loan repayments won’t change
Split Home Loans – Is a mortgage by which part of your loan is on a fixed rate and part is on a variable rate. This type of loan offers somewhat of a middle ground, giving you the flexibility of the variable rate loan with the security of the fixed-rate loan.
Interest Only Home Loan – Is a loan type where you (the borrower) is required to pay only the interest and any subsequent fees for a fixed period of time – this I usually for a short period of time (1-7 years depending on the lender), after which, the loan repayments will revert to an interest and principal loan structure.
Construction Home loan – a loan that is specifically established for those prospective homeowners that are opting to build a home rather than buying an established home. The loan structure of a construction home loan is also different to a regular home loan in that it allows for what’s called a progressive draw down (the amount that you borrow throughout the build process). The total amount of the loan is based on the aspects of the property upon completion of the build. However, the draw down of the loan, progressively increases throughout key milestones of a build.
There is no ONE home loan that is the be-all and end all or a one size fits all option. So be sure to consult with experts in the industry, like First Step Homes who can help you navigate the process and find the best home loan option for your circumstances.