Types of Loans
Yes, there is more than one type!
There are seemingly endless choices of loan options – introductory rates, standard variable rates, fixed rates, redraw facilities, lines of credit loans and interest only loans, the list goes on.
But with choice comes confusion.
How do you determine whether a home loan is suitable for you?
The following guide provides a basic overview.
- Basic Home Loan
- Introductory Rate (also known as a Honeymoon Rate)
- Line of Credit (also know as Equity Line)
- 100% Offset
- Split Loans
Basic Home Loan
This loan is considered a no-frills loan and often offers a lower variable interest rate with little or no regular fees. They usually don’t offer additional extras or features as found on some loans. These loans are directed towards people who don’t want many of the bells and whistles with the loan.
Introductory Rate or ‘Honeymoon’ Loan
This loan is attractive as it offers lower interest rates than the standard fixed or variable rates for the initial (honeymoon) period of the loan (i.e. six to twelve months) before rolling over to the standard rates. The length of the honeymoon depends on the lender, as too does the rate you pay once the honeymoon is over.
This loan usually allows flexibility by allowing you to pay extra off the loan. Be aware of any caps on additional repayments in the initial period, of any exit fees at any time of the loan (usually high if you change immediately after the honeymoon), and what your repayments will be after the loan rolls over to the standard interest rate.
These loans may be appropriate for people who want to minimise their initial repayments (whilst perhaps doing renovations) or to those who wish to make a large dent in their loan through extra repayments while benefiting from the lower rate of interest.
Line of Credit/Equity Line
This is a pre-approved limit of money you can borrow either in its entirety or in bits at a time. The popularity of these loans is due to its flexibility and ability to reduce mortgages quickly. You can liken this type of loan to having a huge credit card.
You only have to pay interest on the money you use (or ‘draw down’). Some lines of credit will allow you to capitalise the interest until you reach your credit limit (i.e. you don’t have to make any repayments until you reach the maximum money available). Most of these loans have a monthly, half yearly or annual fee attached. These loans are suited to people who are financially responsible and disciplined. These loans are generally used for the purchase of property, renovations, investments or personal use. Interest rates are variable and due to the level of flexibility are often higher than the standard variable rate.
100% Offset Account
This loan generally comprises of two components – the home loan and a savings account. This savings account is called an Offset Account and is linked to the home loan. Income is deposited into the Offset Account and you use the Offset Account for all your EFTPOS, cheque, internet banking, credit transactions. Whatever is in the Offset Account then comes directly off the loan, or ‘offsets’ the loan amount for interest. Effectively interest on the loan is calculated on the home loan balance minus what is in the offset account. This kind of loan gives you some of the benefits of a Line of credit, without the fear of spending more than you have saved.
These loans are directed to disciplined savers as the more money kept in the offset account the faster you pay-off your loan. Partial offset account and an interest offset account are also available.
These loans normally have a standard variable interest rate and higher fees due to their flexibility.
Split Loans
This is a loan where the overall money borrowed is split into different segments where each segment has a different loan structure i.e. part fixed, part varied and part line of credit. These loans are directed at people who seek to minimize risk and hedge their bets against interest rate changes while maintaining a good degree of flexibility. These loans are also used when part of the money may be tax deductable or used for investment purposes.