There are many things to consider when it comes to home loans, including the type, repayments and features that can help you make the most of your mortgage.
Starting off with the type of loan - there’s more than just one. In fact, there are eight commonly used loan types in the lending market. Here’s what they are and how they work.
Owner-occupier home loan
This is the standard mortgage in Australia, designed for borrowers who’ll be living in the property the home loan is being used to purchase. Owner-occupier home loans usually have lower interest rates than other loans, such as investment loans, because they’re being used for a property that’s likely to be your main dwelling for years to come, meaning you’re more likely to hang onto it.
Investment home loan
Opposite to the above, an investment home loan is catered towards people purchasing a property for investment purposes - which typically involves renting the property out and, ideally, profiting through a rise in the property’s value over time. Investment home loans often have higher interest rates and stricter eligibility criteria compared to owner-occupier loans, as investors are usually considered riskier borrowers than those buying a home purely to live in.
Construction home loan
If you’re building a new home or majorly renovating an existing one, then a construction home may be for you. Unlike a standard home loan, construction loans cover costs during different stages of the construction process in what’s called a progressive draw-down. The payments generally occur across the deposit, base, frame, lockup, fixing and completion stages.
Low-doc home loan
‘Low-doc’ or low documentation loans are intended for the self-employed, who don’t have the typical proof of income documents, such as employee payslips and pay summaries. Low-doc home loans usually come with higher interest rates and fees to compensate for relative lack of income proof on offer and aren’t offered by as many mainstream lenders, as opposed to investment loans or owner-occupier loans which are more commonplace. If you’re in this boat, it may be worth chatting to a mortgage broker who can give you advice and help you navigate the application process.
Reverse mortgage
Reverse mortgages enable asset-rich but cash-poor individuals (who are usually over 60 years of age) to access their home’s equity. Having a reverse mortgage means you don’t have to make repayments while living on the property but, as with any loan, interest is charged on the amount and when you sell the home, or pass away, the loan must be paid in full, including interest, to the lender. According to the Australian Securities and Investments Commission (ASIC), reverse mortgages can create financial difficulties later in life, which is something to keep in mind when considering this home loan type.
Bridging home loan
As the name alludes to, this is an in-between loan, targeted towards those transitioning from selling their old home and buying a new one. A bridging home loan is technically taken out on top of your existing home loan, with extra money given to you to help buy your second property while the other sells. For this reason, bridging home loans are often shorter, up to a maximum of 12 months in most cases; they also tend to come with heftier interest rates, compared to standard home loans.
Line-of-credit home loan
If you already own a property and have paid off some or all of the mortgage, you’re considered to have home equity. With this type of loan, a line-of-credit loan is borrowed against the equity of your home. Generally speaking, a line-of-credit loan is reusable, which means you can borrow and repay funds up to the credit limit as much as you want.
Guarantor home loan
More of a structure than a product, a guarantor home loan enables you to have a guarantor tied to your home loan (such as a family member) who agrees to make your repayments if you’re unable to. Guarantor home loans can be convenient for low-income earners or those struggling to reach their deposit goal, as some lenders allow guarantor-backed borrowers to take out a 0 per cent deposit home loan, which allows you to get a foot in the door where you might not otherwise be able to.