What Type of Home Loan Is Right for You?

Mortgage managers, banks, credit unions, brokers and insurance groups all offer a choice of loan options – introductory rates, standard variable rates, fixed rates, redraw facilities, lines of credit and interest-only loans. With choice comes confusion. How do you determine what type of home loan is right for you?

First, set your financial goals, determine your budget and work out how long you want to pay a mortgage for. This can be done individually or with guidance from a mortgage broker.

Secondly, ensure the organisation or person you choose to obtain your mortgage from is a member of the Mortgage & Finance Association of Australia (MFAA) or a similar peak industry body. The MFAA Member logo ensures you are working with a professional bound by a strict industry code of practice.

Third, research the types of loans available so you can explore options with your mortgage provider. Some home loan choices include:

**Basic Home Loan**

This loan is considered a no-frills option and usually offers a low variable interest rate with little or no regular fees. Be aware that basic loans may not offer additional extras or flexibility to make extra repayments or vary repayments.

These loans are suited to people who do not foresee a dramatic change in personal circumstances and will not need to adapt the loan to lifestyle changes, or those happy to pay a set amount each month for the loan duration.

**Honeymoon Loan**

This loan may offer lower interest rates than standard fixed or variable rates for an initial honeymoon period before rolling over to standard rates. The length of the honeymoon rate depends on the lender, as does the rate payable once the introductory period ends. This loan type usually allows flexibility to make extra repayments. Be aware of what repayments will be after the loan rolls over to the standard interest rate.

These loans are suited to borrowers looking to minimise initial repayments or those wishing to make extra repayments while benefiting from a lower interest rate.

Tip: Paying off this loan at the post-honeymoon rate from the start creates a buffer of extra repayments and avoids lifestyle changes when the introductory offer ends.

**Redraw Facility**

This facility allows additional funds to be paid into the loan to bring down the principal amount and reduce interest charges, with the option to redraw the extra funds at any time. Rather than earning potentially taxable interest from savings, putting savings into the loan reduces interest charges and helps pay off the balance faster while retaining access to funds.

The interest charged is normally lower than the standard variable rate and does not incur regular fees. Be aware that an activation fee, redraw fees, or minimum redraw amounts may apply.

These loans are suited to borrowers who can pay extra each month to reduce the balance faster, or those wishing to make lump-sum repayments.

**Line of Credit / Equity Line**

This is a pre-approved credit limit that can be borrowed either in full or in portions over time. These loans offer flexibility and can reduce mortgages quickly, though they usually require the borrower to offer their property as security. A line of credit can be set for a negotiated timeframe, generally up to 25 years. Interest is charged only on the funds drawn down. Interest rates are variable and are often higher than standard variable rates due to the added flexibility.

Some lines of credit allow borrowers to capitalise interest up to the credit limit, using the facility to pay its own interest.

**Split Loans**

A split loan divides the overall borrowed amount into different segments with distinct loan structures, such as part fixed, part variable, and part line of credit. Split loans allow borrowers to benefit from multiple loan features simultaneously.

**Professional Package**

Many lenders offer professional packages, often with unique names to distinguish them from competitors. Professional packages offer high flexibility and a discount on the standard variable interest rate. The level of discount depends on the loan size, and the discount duration depends on what is negotiated, sometimes applying for the life of the loan. These products generally combine fees into a single annual fee and may include extra features such as credit cards or discounted insurance products.

Tip: If additional extras are not needed, other loan types may offer a lower overall cost.

**Non-Conforming Loans**

These loans are typically available from specialist lenders, where interest rates are higher due to greater risk and shorter loan terms. They provide an option for borrowers who do not meet traditional lending criteria. Non-conforming loans are often a temporary solution, and refinancing options may become available once the borrower establishes a reliable repayment history.

These loans are suited to borrowers with adverse credit histories.

**Other Loans and Products in the Market**

**Construction Loans**: Suited for building a home when the full amount is not needed immediately. Interest is charged only on funds drawn over the stages of construction.

**Bridging Loans**: Used when purchasing a new property before selling an existing one, where proceeds from the sale are applied directly to the new loan upon settlement.

**Consolidation Loans**: Enables a mortgage to consolidate other debts, such as credit cards, personal loans, or car loans, which often carry higher interest rates than home loans.

**Reverse Mortgage Loans**: Designed for borrowers wanting to use home equity to supplement retirement income. Funds can be released as a lump sum or in instalments, and the lender is repaid from property proceeds when the borrower sells, moves out, or passes away.

There are many loan options available, and understanding the features helps in making an informed decision.