With so many different types of loans out there, each with different features, it can be a challenge to know which one is right for you.
Whether you’re buying your first house, investing in property, or even renovating, finding the right loan can make all the difference, AMP Bank’s Michael Christofides tells.
"As a first step, it’s important to understand what you’re looking for, how much you can afford to repay each month and any additional financial benefits you would find useful.
"Once you understand what you need from your home loan, you’ll be in a much better position to start looking at what might be available and the best financial match for your lifestyle," he says.
While many of us know about variable or fixed-rate loans, there are other options and Michael gives us the rundown:
Variable rate loan
With this type of loan, your interest rate is subject to change at any time. Therefore before you commit to this type of loan you need to be sure that your budget can cover an increase in interest rates, Michael suggests. However, you also get an added benefit when interest rates decrease.
"A key feature to a variable rate loan is having one or more offset accounts. This allows you to minimise the interest you will pay over the life of your loan," he explains. "Generally, those who choose a variable rate loan will, over the lifespan of a mortgage, pay less than they would on a fixed rate. If you’re looking for flexibility in a loan this could be the one for you, although it’s worth checking out a budget tracker to be certain you can cover the repayments going up by $50 or even $100."
Fixed term loan
"If you like consistency and being able to budget accurately each month you might prefer the assurance of a fixed-rate loan. With this loan, you’ll know exactly how much you need to repay each month and the total you’ll repay overall.
"You will agree with your bank the fixed rate for a term, so you could have the same repayments for one, three, five or more years before it reverts to a variable rate, at which point you’ll need to negotiate with your bank as to the next fixed-term rate," he tells.
Split interest loan
A split-interest loan allows you to get the best of both worlds, Michael suggests. "If you’re looking for the certainty of a fixed loan but also the flexibility of the variable option then this could be the perfect loan for you," he says.
"Opting for a split-interest loan means that part of your loan will be variable and subject to change, while the other half remains at a fixed rate. This means your repayment amount may vary month to month, however not quite as much as it would with the variable-rate version."
An interest-only loan means that, for an agreed period, your repayments will only cover the interest.
"The benefit of an interest-only loan is the repayments will be lower during the term. Typically, the term for an interest-only loan is between one to five years. After the agreed term your repayments would increase to start covering the debt too," Michael says.
Michael suggests this loan could be worth considering if you don't have enough of a deposit.
"It allows you to buy a property with 5 per cent deposit, as long as you can cover the repayments on a mortgage. However, this type of loan does require you to have a guarantor who is happy to put their property, or a property they have equity in, up against the mortgage for security," he adds.
Line of credits
Generally, the interest rate on a line of credit loan will be higher than a variable rate loan, Michael tells.
"A line of credit loan allows you to borrow money with greater flexibility for your cash flow, which can be especially useful if you’re looking to make renovations," he says. "This loan allows you to consolidate your borrowing into one easy-to-manage loan account. So, if you have an approved credit limit of $200,000 and you use $50,000 for home improvements, you’ll only pay interest on $50,000. Once you pay back the $50,000, you’d have $200,000 available when you need it."
Michael says to also consider whether any financial benefits on offer could benefit your lifestyle. "Would a redraw facility that lets you take out the extra money if you need it to help you down the line or might you be looking to make extra payments? Generally, most variable rate loans allow extra repayments whereas fixed rate loans generally cap the amount of extra repayments you can make," he says.
"A home loan is a huge commitment and one that shouldn’t be taken lightly. It’s important to be realistic about what you can afford without it impacting on your lifestyle. Be sure to fully understand the ins and outs of the loan you’re signing up for by going through everything in detail with your broker or adviser."
Information is provided by AMP Bank Limited ABN 15 081 596 009, AFSL and Australian Credit Licence 234517.
It’s important to consider your particular circumstances and read the relevant terms and conditions before deciding what’s right for you. This information hasn’t taken your circumstances into account.