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A short guide on different types of home loans in the market

A short guide on different types of home loans in the market

When you’re buying a property, you’ll have lots of decisions to make and one of the most important is choosing the right type of loan.

Different types of home loans are better suited to certain conditions or requirements. For instance, if you’re building your home from scratch, a construction loan might be more beneficial for you than taking out a regular home loan. Therefore, it is worth knowing the different types of home loans and what they might be used for.

What are the different types of mortgage loans?

Just like the fingers in your hand, all home loans are different and the best mortgage for you depends on your circumstances, future plans and how you intend to use the property. It helps to remember a mortgage is a long-term agreement, and having the wrong one can adversely impact your lifestyle and finances. For more personalised advice, you may need to contact a mortgage broker to discuss your requirements in detail.

  • Fixed and variable rate home loans

When you take out a home loan, one your first choices will be between a fixed or variable rate home loan. But what does that mean?

Typically, when you take out a variable rate mortgage, the interest rate that you pay on it can change at any time, based on the official cash rate set by the Reserve Bank of Australia. This type of mortgage product is quite popular with borrowers as it offers more financial flexibility than a fixed-rate home loan. For instance, you might find yourself paying less during certain months when the interest rates fall. On the other hand, you must be prepared for rate hikes.

For borrowers who want more interest rate certainty, a fixed-rate mortgage may be a better option. When you choose a fixed-rate mortgage, you make your repayments at a fixed interest rate for a specified period, often up to 5 years, before it reverts to the standard variable rate offered by the lender.

  • Owner-occupied and investment loans

You can purchase a property to make it your home or use it as a rental to supplement your income. Depending on how you intend to use the property, you can choose between an owner-occupied or investor loan, both of which come with different sets of features and rates.

Owner-occupied home loans are available to borrowers who plan to live in the home they’re financing. You can take out an owner-occupied loan to purchase an existing home or construct a new property. Both fixed and variable rate options are available, and these loans are typically principal and interest rate loans, wherein you repay a portion of the principal along with interest accrued on the outstanding amount each month.

An investment loan, on the other hand, is used to finance a property you won’t live in - at least initially. You can choose to only pay the interest on the loan, leading to smaller monthly repayments and better cash flow. However, you must remember that the interest-only period is for a limited time of up to 5 years in most cases, and your repayments will jump considerably once that period is over.

  • Construction loans

When you take out a regular mortgage, you receive the money you require to buy the property at the start of the loan term as a lump sum. On the other hand, a construction loan is structured to pay you money in instalments to finance the various stages in the construction process. Instead of receiving a lump sum, you only draw down the amount you need to lay the foundation, build the frame, and so on at each subsequent milestone until the house is built.

Usually, the loan is structured in a way that you only pay interest while the house is being built and only on the money you’ve drawn down so far. This minimises your repayments until the construction is complete when the loan reverts to a traditional principal and interest loan.

  • Bridging loans

bridging loan is a short-term financing solution used to ‘bridge’ a brief gap in funding. Bridging loans are often used to finance a new property when the old one isn’t sold yet.

Usually, these loans are interest-only with a limited duration, up to 12 months, and used for managing the repayments for a new property until your existing home is sold.

  • Low-doc loans

Lenders require multiple documents like your recent bank statements and payslips to verify your income when applying for a home loan. However, self-employed individuals, freelancers and small business owners might struggle to provide the standard proof of income documentation required for a traditional home loan. If you find yourself in such a situation, you may apply for a low doc loan that doesn’t require standard documentation for approval. Instead, you’ll be asked to provide income proof like:

  • Two years of personal tax returns;
  • Business activity statements (BAS);
  • Profit and loss statements;
  • An accountant’s letter verifying your financial position.

Note that low doc loans often come at a higher interest rate, but they can help you get a foothold in the property market if you’re a non-traditional borrower. You may refinance to a regular home loan at a better rate once the required documentation is available.

  • SMSF loans

Some lenders offer home loans to self-managed super funds (SMSFs) to purchase investment properties. The returns on the investment property, whether rental income or capital gains, are channelled into the super fund to grow the retirement savings of the trustees.

  • Bad credit home loans

If you’ve had credit issues in the past, you might still not be eligible for a mortgage owing to a poor credit score. In such a situation, you may apply for a bad credit home loan with a non-conforming or specialist lender who will assess your application after listening to your side of the story. However, you must be able to convince the lender about your ability to repay the loan and that a mortgage will help improve your financial situation (if you’re looking at debt consolidation) to get approved for a home loan with bad credit.

  • Reverse mortgages

If you’re 60 years or above and looking for a way to fund your retirement without selling your home, a reverse mortgage on your home might be an option. A reverse mortgage is structured so that you can continue living in the house after borrowing money against it without making any repayments. However, if you pass away or move out, the property is sold to repay the lender.

Getting the right home loan for your property purchase

As you can see, there are plenty of mortgage loans available to meet the requirements of borrowers. By understanding the various options in the market, you can choose a product that’s best suited to your needs. If you’re confused or need specific information, you can contact a mortgage broker and discuss your situation in detail. A decent mortgage broker will help you identify the right mortgage product and also figure out the right-sized loan for you.

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This article was reviewed by Personal Finance Editor Jodie Humphries before it was published as part of RateCity's Fact Check process.



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Learn more about home loans

What is a secured home loan?

When the lender creates a mortgage on your property, they’re offering you a secured home loan. It means you’re offering the property as security to the lender who holds this security against the risk of default or any delays in home loan repayments. Suppose you’re unable to repay the loan. In this case, the lender can take ownership of your property and sell it to recover any outstanding funds you owe. The lender retains this hold over your property until you repay the entire loan amount.

If you take out a secured home loan, you may be charged a lower interest rate. The amount you can borrow depends on the property’s value and the deposit you can pay upfront. Generally, lenders allow you to borrow between 80 per cent and 90 per cent of the property value as the loan. Often, you’ll need Lenders Mortgage Insurance (LMI) if the deposit is less than 20 per cent of the property value. Lenders will also do a property valuation to ensure you’re borrowing enough to cover the purchase. 

Is a second mortgage tax deductible?

If you take out a loan to invest in a property, you can claim a tax deduction on the interest you pay as long as the property is earning income. In other words, if you rent the property for the entire year, you can claim a tax deduction for 12 months of interest payments. But, if you use the home for six months and rent it for the other six months, you can claim deduction only for 50 per cent of the interest amount.

You also get tax benefits for items that lose value over the years. But, the entire amount is not allowed as a tax deduction in the same year; instead you’ll have to claim a portion each year over a number of years. 

Additional borrowing costs, such as maintenance fees, stamp duty, offset account setting up fees, Lenders Mortgage Insurance (LMI), and establishment fees, can also be claimed as tax deductions.

Before you claim second mortgage tax deductions, it’s often worth checking with an experienced tax expert.

What do people do with a Macquarie Bank reverse?

There are a number of ways people use a Macquarie Bank reverse mortgage. Below are some reasons borrowers tend to release their home’s equity via a reverse mortgage:

  • To top up superannuation or pension income to pay for monthly bills;
  • To consolidate and repay high-interest debt like credit cards or personal loans;
  • To fund renovations, repairs or upgrades to their home
  • To help your children or grandkids through financial difficulties. 

While there are no limitations on how you can use a Macquarie reverse mortgage loan, a reverse mortgage is not right for all borrowers. Reverse mortgages compound the interest, which means you end up paying interest on your interest. They can also affect your entitlement to things like the pension It’s important to think carefully, read up and speak with your family before you apply for a reverse mortgage.

What is the ANZ home loan settlement process?

Settlement is the procedure for the official transfer of ownership between the seller and buyer. It’s often done without the seller or buyers input but between both parties’ the financial and legal representatives.

Here is how the ANZ home loan settlement process works:

  1. The solicitor or conveyancer prepares the Transfer of Land document at least two weeks before the settlement date.
  2. The signed document is registered at the state or territory land registry office.
  3. Your solicitor or conveyancer will connect with the ANZ home loan settlement contact and the seller’s solicitor or conveyancer to finalise the date, time, and place of settlement.
  4. You must deposit any applicable amount into your ANZ account three days before the settlement date.
  5. After the settlement is completed, your solicitor or conveyancer will send you a Statement of Adjustment confirming the disbursal of funds from your home loan amongst the involved parties.

How does ANZ calculate early repayment costs?

If you have a fixed interest home loan, you’ll pay ANZ home loan early exit fees for partial or full repayment of the loan amount before the end of the fixed interest rate duration. These fees are also payable if you switch to another variable or fixed-rate loan.

The ANZ mortgage early exit fees can vary and you can get an estimate from the lender before you decide to prepay the loan. However, the exact early repayment cost can be determined when you prepay the loan.

The early exit fees are calculated after considering factors like the prepayment amount, the period left before the fixed-rate duration ends, and the change in the market rates since the beginning of the fixed-rate period. The early exit fees may not be charged if you’re paying off a smaller amount. You can check with ANZ to see how much you’ll have to pay.

What is the ME bank home loan approval time?

To start the process of getting a loan with ME bank, you can fill out the online application form. You’ll have to provide information about your income details, assets and liabilities, and the property you want to buy.

Generally, the pre-approval of your loan application can happen within four hours, and in some instances, it may take up to two weeks. It’s important to remember this is only conditional approval.

If you make an offer and the seller accepts it, you’ll need to wait for the cooling-off period, which varies from two to five days depending on where you live. After that, it can take between six and eight weeks after contracts have been exchanged for your application for unconditional approval to be processed.

Who offers 40 year mortgages?

Home loans spanning 40 years are offered by select lenders, though the loan period is much longer than a standard 30-year home loan. You're more likely to find a maximum of 35 years, such as is the case with Teacher’s Mutual Bank

Currently, 40 year home loan lenders in Australia include AlphaBeta Money, BCU, G&C Mutual Bank, Pepper, and Sydney Mutual Bank.

Even though these lengthier loans 35 to 40 year loans do exist on the market, they are not overwhelmingly popular, as the extra interest you pay compared to a 30-year loan can be over $100,000 or more.

How long should I have my mortgage for?

The standard length of a mortgage is between 25-30 years however they can be as long as 40 years and as few as one. There is a benefit to having a shorter mortgage as the faster you pay off the amount you owe, the less you’ll pay your bank in interest.

Of course, shorter mortgages will require higher monthly payments so plug the numbers into a mortgage calculator to find out how many years you can potentially shave off your budget.

For example monthly repayments on a $500,000 over 25 years with an interest rate of 5% are $2923. On the same loan with the same interest rate over 30 years repayments would be $2684 a month. At first blush, the 30 year mortgage sounds great with significantly lower monthly repayments but remember, stretching your loan out by an extra five years will see you hand over $89,396 in interest repayments to your bank.

What are the benefits of a reverse mortgage from P&B Bank?

A reverse mortgage allows senior homeowners to unlock the equity in their homes. There is no repayment schedule, and the loan is repaid at the time of selling, if you move out or when the homeowner passes away. The interest accumulates on the outstanding amount and is added to what was initially borrowed.

Here are some benefits of applying for a P&B Bank reverse mortgage:

  • Flexibility to use the funds as desired; you can travel, pay for medical bills or undertake home improvements or use it for your regular living costs
  • A negative equity guarantee ensures the amount you have to repay never exceeds the value of your home
  • A reverse mortgage does not have a regular monthly instalment, and you can repay any amount you wish at any point during the loan tenure
  • You can choose to withdraw the loan amount as per your requirements

The P&B Bank reverse mortgage amount is based on factors like your age, location of the property, and the loan-to-value ratio (LVR).

How do I apply for a home improvement loan?

When you want to renovate your home, you may need to take out a loan to cover the costs. You could apply for a home improvement loan, which is a personal loan that you use to cover the costs of your home renovations. There is no difference between applying for this type of home improvement loan and applying for a standard personal loan. It would be best to check and compare the features, fees and details of the loan before applying. 

Besides taking out a home improvement loan, you could also:

  1. Use the equity in your house: Equity is the difference between your property’s value and the amount you still owe on your home loan. You may be able to access this equity by refinancing your home loan and then using it to finance your home improvement.  Speak with your lender or a mortgage broker about accessing your equity.
  2. Utilise the redraw facility of your home loan: Check whether the existing home loan has a redraw facility. A redraw facility allows you to access additional funds you’ve repaid into your home loan. Some lenders offer this on variable rate home loans but not on fixed. If this option is available to you, contact your lender to discuss how to access it.
  3. Apply for a construction loan: A construction loan is typically used when constructing a new property but can also be used as a home renovation loan. You may find that a construction loan is a suitable option as it enables you to draw funds as your renovation project progresses. You can compare construction home loans online or speak to a mortgage broker about taking out such a loan.
  4. Look into government grants: Check whether there are any government grants offered when you need the funds and whether you qualify. Initiatives like the HomeBuilder Grant were offered by the Federal Government for a limited period until April 2021. They could help fund your renovations either in full or just partially.  

Does the Home Loan Rate Promise apply to discounted interest rate offers, such as honeymoon rates?

No. Temporary discounts to home loan interest rates will expire after a limited time, so they aren’t valid for comparing home loans as part of the Home Loan Rate Promise.

However, if your home loan has been discounted from the lender’s standard rate on a permanent basis, you can check if we can find an even lower rate that could apply to you.

What are the different types of home loan interest rates?

A home loan interest rate is used to calculate how much you’ll pay the lender, usually annually, above the amount you borrow. It’s what the lenders charge you for them lending you money and will impact the total amount you’ll pay over the life of your home loan. 

Having understood what are home loan rates in general, here are the two types you usually have with a home loan:

Fixed rates

These interest rates remain constant for a specific period and are a good option if you’re a first-time buyer or if you’re looking for a fixed monthly repayment. One possible downside of a fixed rate is that it may be higher than a variable rate. Also, you don’t benefit from any lowering of interest rates in the market. On the flip side, if rates go up, your rate won’t change, possibly saving you money.

Variable rates

With variable interest rates, the lender can change them at any time. This change can be based on economic conditions or other reasons. Changes in interest rates could be beneficial if your monthly repayment decreases but can be a problem if it increases. Variable interest rates offer several other benefits often not available with fixed rate home loans like redraw and offset facilities and free extra repayments. 

How do you determine which home loan rates/products I’m shown?

When you check your home loan rate, you’ll supply some basic information about your current loan, including the amount owing on your mortgage and your current interest rate.

We’ll compare this information to the home loan options in the RateCity database and show you which home loan products you may be eligible to apply for.


What happens to my home loan when interest rates rise?

If you are on a variable rate home loan, every so often your rate will be subject to increases and decreases. Rate changes are determined by your lender, not the Reserve Bank of Australia, however often when the RBA changes the cash rate, a number of banks will follow suit, at least to some extent. You can use RateCity cash rate to check how the latest interest rate change affected your mortgage interest rate.

When your rate rises, you will be required to pay your bank more each month in mortgage repayments. Similarly, if your interest rate is cut, then your monthly repayments will decrease. Your lender will notify you of what your new repayments will be, although you can do the calculations yourself, and compare other home loan rates using our mortgage calculator.

There is no way of conclusively predicting when interest rates will go up or down on home loans so if you prefer a more stable approach consider opting for a fixed rate loan.