Confused about what type of loan you should use to purchase your next property investment? Here we introduce you to the common types of mortgage and home loans within Australia.
Variable Mortgage Rate
A variable mortgage means your interest rate will change, moving up or down depending on the official cash rates. These interest rate changes are set by the Reserve Bank of Australia. If they go up, so too do your required payments. But, if they go down, you can potentially be paying less and less each month. The potential for a lower repayment is why many Australian’s choose to go with a variable mortgage for their home loan when investing in property.
Fixed Mortgage Rate
Unlike the variable, a fixed mortgage means your interest rate won’t change. This means, your repayments will stay the same no matter what changes occur within the Reserve Bank of Australia. This is a really great option to choose if you are able to secure an excellently low interest rate. But remember, if the interest rates drop below your fixed rate you won’t be able to take advantage of it and pay less. Most fixed rates are offered within a period of a few years before switching to variable. The period length will vary from lender to lender.
Combination or Split Loans
You can split your loan, which means you can secure some of the total into a fixed rate and have the remaining set as variable. This has the potential to allows you to fix a great interest, but still have the potential of a variable should the rates go even lower.
This is what a lender will term the early months of your mortgage. Sometimes within Australia you will be able to find lenders willing to offer significantly lower interest rates for a limited amount of time (commonly between six and twelve months). This is called a honeymoon rate, after which time the rate will revert to the standard rate at the time.
Home Equity Loan
An equity home loan is structured differently than other loan types, but essentially it allows you to take the equity from one property in order to purchase another. It is a common loan type amongst experienced property investors and businesses.
Mortgage Offset Accounts
A mortgage offset account, means that your loan is linked to a regular savings account in which your salary is deposited. The money that is sitting in your savings account will be offset against your loan, in order to have no interest charged on that amount. This only works if you have the correct amount of savings to offset the interest.
Reverse Mortgage or Equity Release
This type of mortgage is often appealing to retirees who have paid off their home, but is applicable to anyone who has a lot of assets but little to no income. Lenders loan you a lump sum, and in return they are granted a stake in the home that is equivalent to the loan amount. This stake is generally claimed upon the sale of the property.
An shared equity loan means that the lender has offered a discounted interest rate (or no interest at all) on a portion of the loan, in exchange for a share in the property’s capital appreciation. If you are struggling to enter the property market, this may be a great loan option for you. This loan type allows for a lower interest rate which means lower repayments, making it much easier to afford a property.