Home Loans: Which One ?

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Home Loans: While you're talking to people involved in Banking and Finance, you'll be subjected to a barrage of industry jargon and terminology specific to different types of loans.

No point taking their word for it, let's take a quick look at a few of the more common types of home loans now.

THE STANDARD VARIABLE LOAN

The main feature of this type of loan is that the interest rate can vary throughout the term of the home loan. This allows the borrower to take advantage of any decreases in interest rates, effectively reducing home loan repayments as the interest rate drops.

The disadvantage of this type of home loan is that the borrower will also be subjected to any increases in interest rates. Of course, any increase in interest rates will also increase home loan repayments.

The term of the standard variable home loan is usually between 20 - 25 years.

You can generally make additional repayments on the standard variable home loan in order to pay off the principal home loan amount faster, without incurring penalties.

THE BASIC VARIABLE LOAN

The basic variable home loan usually has a lower interest rate than the standard variable home loan, but may have less features and flexibility. As with the standard variable home loan, the interest rate can fluctuate over the term of the loan, with home loan repayments adjusted accordingly.

As the basic variable home loan usually has a lower interest rate than the standard variable home loan, repayments are usually less.

As these home loans may be linked to the money market, there may be more chance of fluctuations in the interest rate.

FIXED RATE LOANS

The fixed rate home loan has an interest rate and repayment figure that is set for a fixed period. This may be between one and five years.

The nature of the fixed rate home loan is to provide some stability for the borrower in the early years of the loan (generally a time when young borrowers are subject to the greatest financial difficulties).

After the fixed term, the loan may default to a variable home loan, however you may be able to arrange another fixed term.

The advantage of the fixed rate home loan is that in an environment of rising interest rates, the borrower's home loan interest rate will remain at the same, agreed level.

The disadvantage of the fixed rate home loan is that the borrower will not receive the benefit of any decreases in home loan interest rates.

You may be subjected to a penalty for additional payments made to your fixed term home loan. If you decide to change the fixed rate home loan to a variable rate home loan, or change lenders, before the term of the home loan is finished, you may incur sizeable penalties.

THE CAPPED LOAN

Capped loans have a ceiling placed on the interest rate applied to the loan for a fixed period of time. If interest rates rise, the borrower will be subjected to those increases only up to the amount of that ceiling (for the specified period).

If interest rates decrease, the borrower will enjoy the resultant decrease. There is no ceiling below which the interest rate applied to the loan cannot fall.

Interest rates are generally capped for one year or less, then defaulting to the standard variable rate loan.

The capped loan is generally only available to new customers.

THE INTRODUCTORY LOAN

The interest rate of an introductory loan is generally low in order to attract borrowers. The low interest rate applied to an introductory loan may be applied for a period of two years or less.

After that period, the introductory loan generally defaults to the standard variable rate.

THE EQUITY LOAN

This type of loan is for people with existing mortgages who have already built up equity in their home.

Equity is the difference between the value of the home and what the borrower owes on the mortgage. It is important to understand that the value of the home is based on the current market value, not the price the borrower paid for it.

If the borrower has equity in the home, a loan can be taken out against that equity to allow the borrower funds to use for other worthwhile purposes (renovations, buying a car, an overseas holiday etc). Most lenders will set a minimum equity level requirement, and this is generally at least 25% of the value of the home.

THE COMBINATION LOAN

A combination loan is one that allows you to divide your principal loan into segments.

You may choose to fix a portion of the loan (so that the interest rate remains the same for the fixed period), with the remainder of the loan structured as a variable rate loan.

The advantage of this type of loan is in allowing the borrower to make accelerated payments on the variable portion of the loan without suffering the penalties that are incurred when such accelerated payments are applied to a fixed rate loan.

The combination loan can be structured for personal or taxation purposes.

THE CONSTRUCTION LOAN

CONFUSED?

Choosing a loan product can be confusing, so it pays to take your time before deciding which loan suits you best. When you're satisfied that you've found the deal and the product for you, and you're quietly confident of your ability to pay, you're ready to begin the search for 'your place'.

Before you leap head on into this phase, make sure you've got your house in order. If you find your dream home within the first few days of house-hunting, you may be awfully disappointed when you realise that the paperwork required by your Lender will take so long to prepare that the vendor sells to someone else - better organised!

Construction loans are used for the purpose of building a new home.

Lenders will generally lend up to 95% of the land and construction cost. The lender disburses money to the builder at various stages throughout the construction of the home as work is completed.

Repayments made by the borrower are usually interest only on the amount paid out, until the loan is fully drawn.

Once the building is complete the loan is then set at the rate for whichever product is chosen by the borrower.