Many Australians dream of owning a home. Let’s face it: Navigating through the home loan options can be quite overwhelming, especially for first-time buyers. It’s crucial to have a grasp of the types of loans and how they suit your specific situation. Home loans are not a one-size-fits-all solution. Each option caters to scenarios and property objectives.
Whether you’re purchasing your home, an investor seeking income, or someone with unique paperwork requirements, selecting the right home loan can greatly impact your home-buying experience. In this user guide, we will explore all the home loan choices in Australia. We’ll simplify things by explaining the aspects of each loan type without any confusing jargon.
Investment loan vs. owner-occupied
If you’re buying a house or apartment to live in yourself, that’s an owner-occupied property. You’re the owner, and you’ll be occupying it as your residence. But if you’re getting a place with the intention of renting it out to other people or flipping it to sell later, that’s considered an investment property. You’re investing in it as an asset to make money, not to live there yourself.
Now, some people might do a mix of both. They could live in a place for a while, and then once they move out, they keep it and rent it out as an investment. Or they might buy a place as an investment first, rent it out, but then later on decide to move into it themselves.
If that’s the plan and you want to switch your mortgage to an owner-occupier home loan, you’ll probably need to live there for a certain amount of time before the lender lets you make that change. And one more thing—if you buy a small apartment building with up to four units and live in one of those units yourself, that usually counts as an owner-occupied situation, too.
Home loans come in various shapes and sizes, each tailored to different borrower needs and preferences. Understanding the key features and trade-offs of the main home loan types is essential to make an informed decision.
Variable-rate home loans
A variable-rate home loan has an interest rate that fluctuates based on market conditions. As interest rates go up or down, your repayment amount changes accordingly. These loans typically allow features like making unlimited extra repayments to pay off the loan faster, redrawing extra funds you’ve paid, and the ability to top up or increase your loan amount. However, the downside is your repayments can increase when interest rates rise, impacting your budget.
Variable rate with offset account
This is similar to a variable loan but with the addition of an offset account. Funds kept in this account are “offset” against your loan balance, reducing the amount of interest you pay. This can help you pay off your loan faster. However, the offset account does not earn interest, and the loan may have a higher interest rate.
Fixed-rate home loans
With a fixed-rate loan, you lock in an interest rate for a fixed period, usually 1-5 years. Your repayments remain the same during this time regardless of market fluctuations. This provides repayment consistency and easier budgeting. The downsides are limited extra repayments, an inability to take advantage of lower interest rates, and break costs for exiting the loan early.
Split-rate home loans
A split loan combines a fixed and variable portion. The fixed part provides repayment consistency, while the variable allows you to benefit from potential interest rate drops, make extra repayments, utilize an offset, and access other variable loan features. However, increases impact the variable portion, and the fixed part carries limitations like a fixed loan.
Defence home loan
The Defence Home Loan (DHOAS) is a special scheme that provides a monthly interest subsidy to make home loans more affordable for eligible current and former Australian Defence Force members. The subsidy amount, paid directly into your loan, depends on your length of service – up to 80% for longest-serving members. To qualify, you must have recent ADF service and live in the property. It’s a valuable benefit assisting ADF personnel and veterans with achieving home ownership.
Guarantor Loan
A guarantor loan allows someone, usually a close family member, to use their home equity or savings as additional security to help you qualify for a mortgage. With a guarantor’s backing, lenders see you as less risky, so you may be approved for a bigger loan amount, even with a small deposit or limited income. The guarantor’s involvement reduces the lender’s risk but also puts the guarantor on the hook if you can’t make your payments. Over time, as you build equity in the property, the guarantor can be released from their obligations.
First Home Loan Deposit Scheme (FHLDS)
The FHLDS is a government scheme that allows eligible first-time home buyers to purchase a property with just a 5% deposit instead of the typical 20%. The government essentially acts as a guarantor for the loan, saving you from having to pay costly lender’s mortgage insurance. To qualify, you must be an Australian citizen who has never owned property before and have an income under certain limits. The scheme makes it easier for first-timers to enter the property market without spending years saving for a huge deposit upfront.
Low-doc loan
A low-doc loan requires less documentation and paperwork than a standard home loan. It’s designed for self-employed borrowers or those with irregular income sources who may not have typical financial records. You can get approved faster With proof of a decent credit score and steady income over the past year. However, low-doc loans tend to come with higher interest rates since there is more risk for the lender. While convenient, be prepared for potentially higher costs in exchange for the easier qualification process.
Bridging loan
A bridging loan is a short-term loan that helps you transition between selling your existing property and buying a new one. It essentially “bridges” the gap, giving you up to 6 months to sell your old place while allowing you to secure your new home.
Construction loan
Unlike a regular home loan provided in one lump sum, a construction loan lets you draw funds progressively as your new build progresses. This aligns with the ongoing payments needed throughout the construction process.
Interest-only loan
With this type of loan, you initially only pay the interest charges, not the actual principal amount borrowed. This results in lower repayments upfront but is usually just for a limited period of up to 5 years before requiring principal repayments too.
Introductory/honeymoon loan
These loans start with a low introductory interest rate for around 12 months to attract borrowers. Once the “honeymoon” period ends, the rate reverts to the lender’s higher standard rate.
Loans for pensioners
While more challenging, pensioners and older borrowers can still get home loans. Options like reverse mortgages, lines of credit, and investment loans may be available, albeit with tighter borrowing limits due to the perceived higher risk.
Line of credit loan
If you’ve built up equity in your property over time, a line of credit loan lets you access those funds as needed rather than a lump sum. It provides flexible access to funds but can be costly if not managed properly.
Non-conforming loan
For borrowers with poor credit histories, non-conforming loans use alternative evidence of repayment ability rather than just the credit score. They typically require larger deposits and higher interest rates.
Self-employed loans
Self-employed borrowers usually need to provide 2 years of tax returns, profit/loss statements, business bank statements, and liability details to demonstrate their income and serviceability for a home loan.
Factors to consider when choosing a home loan
Picking the right home loan lender is super important when buying a place. With so many different banks and lenders out there offering all sorts of home loan options, there are a few key things you’ll want to look at to make sure you end up with a loan that works for your situation and budget.
When it comes to picking a home loan, there are several important things to look at like:
- Interest rate: This is probably the biggest one. A lower interest rate means lower repayments, so shop around for the best deal.
- Fees and charges: Watch out for all those pesky fees like application, settlement, and ongoing account fees. They can really add up over the life of the loan.
- Loan features: Consider what matters most to you, such as fixed or variable rates, the ability to make extra repayments, redraw facilities, offset accounts, etc.
- Customer service: You’ll be dealing with this lender for years, so make sure they provide great service and are easy to contact if needed.
- Lender reputation: Stick with established, reputable lenders you can trust to be around for the long haul.
- Add-ons: Some lenders sweeten the deal with extras like insurance discounts or financial advice. These are nice little bonuses if they’re useful to you.
- Convenience: How easily can you manage the loan? Online, by app, at local branches, etc. Pick what fits your lifestyle.
- Approval process: Nobody likes delays holding up their home purchase. See which lenders are known for fast approvals.
When should I seek financial advice when buying a house?
You should strongly consider seeking financial advice when buying a house in the following situations:
- If you’re unsure how much home you can truly afford based on your income, debts, and other financial goals. An advisor can analyze your full financial picture and recommend a realistic price range.
- If you need help preparing your finances for the homebuying process, such as creating a budget to save for a down payment, paying off debts to qualify for better mortgage rates, or building an emergency fund for homeownership costs.
- If you’re a first-time homebuyer unfamiliar with the process, an advisor can explain the different costs involved, guide you through getting pre-approved, and ensure you consider factors like insurance and long-term planning.
- Taking on a mortgage may impact your ability to save for other major goals like retirement. An advisor can help balance the home purchase with your other financial priorities.
Summing up
Choosing the right home loan is critical for such a major financial decision. With so many options available, don’t go it alone. Seek guidance from professionals who can assess your full financial situation and goals to recommend the ideal loan type. The perfect home loan balances a great rate with the right features and flexibility to fit your lifestyle.
By doing your research and getting expert advice, you can confidently secure a home loan that sets you up for long-term homeownership success. By making this effort, you can make sure that you will get the keys to your dream home.
