We have so many types of loans available to us, simply because collectively there are so many variables in our financial situations and ways of purchasing or investing.
But that’s a good thing.
As the consumer you have never had this much choice. It’s just a matter of finding the right information and connection with the best lender for the product that suites you best.
Before getting into the loan types, it’s also important to understand the terms principle and interest. Principle is the amount of money you have borrowed and need to pay back, and interest is what the lender charges you for allowing you to borrow funds.
These are the most common types of loans:
Variable rate – variable rate loans are the most popular as the principle and interest repayments fluctuate with the changes to the interest rate set by the Reserve Bank of Australia.
Why a variable rate loan can be good for you?
If the interest rate falls, your minimum monthly repayments will decrease
Why a variable rate can be bad for you?
If the interest rate rises, you may need to rethink your budget if you have not allowed for a fluctuation in the interest rate.
Fixed rate – fixed rate loans are structured so that for a fixed period of time (often the first 1 to 5 years) the interest rate does not change, regardless of the interest rate fluctuations, so therefore, monthly repayments are always the same.
Why a fixed rate loan can be good for you?
A fixed rate loan allows you to manage your budget more efficiently.
Why a fixed rate loan can be bad for you?
Should the rate decrease significantly, you cannot benefit from any potential savings.
Split rate – split rate loans allows you the best of both worlds; your loan amount is split with one part fixed and the other variable.
Why a split rate loan can be good for you?
The flexibility to benefit from decreased interest rates and the ability to pay the variable part faster
Why a split rate loan can be bad for you?
If you chose to exit the fixed portion early, you could face financial penalties.
Interest only – interest only loans only require repayments on interest, therefore, reducing monthly repayments. Traditionally, interest only loans was used for investors, but is now becoming more popular with borrowers purchasing high value homes. However, we don’t recommend this loan type just to increase affordability as lenders will no longer allow owner occupied loans to be interest only without valid reasoning.
Why an interest only loan can be good for you?
Lower monthly repayments.
Why an interest only loan can be bad for you?
Because only interest is payed, you don’t reduce your home loan value, and as a result, do not grow equity so you will not be able to borrow against your home loan.
Other types of loan include:
- Low doc loans
- Self-employed loans
- Solicitor loans
- Line of credit loan
- Non-conforming loan
- Introductory loan
Want to find out more? Speak to our experienced team of brokers today. Call 1300 652 842 or email info@whitestar.kinsta.cloud.