4 Home Loans Everyone Should Know About

As soon as you purchase your new home, it’s generally time to choose a home loan package. With so many home loan options it can easily get overwhelming, especially if it’s your first time buying a house and choosing a home loan.

Allow us to share the four most common loan options to get you started with the basics and help you decide which one best suits your needs.

Fixed-Rate Loan

A fixed-rate loan is one of the simplest home loans on the market and one of the most commonly used. It is a loan that has the same interest rate for a specified period of time (eg. 1 year, 2 years, 5 years, or longer). The advantage of this type of mortgage loan is that it offers stability to the borrower at least for the fixed period. The interest rate remains the same and therefore repayments remain stable throughout the fixed loan period, regardless of interest rate changes.

Variable-Rate Loan

This type of loan unlike the fixed-rate loan is subject to interest rate changes, according to conditions of the market. This generally occurs when the Reserve Bank of Australia (RBA) modifies the official cash rate.

There are two modalities in variable-rate loans, standard and basic variable. The standard variable rate loan has flexible features like compensation, redrawing, overpayment, and the ability to split the loan. The basic variable loan usually has lower rates, but it offers less flexible features. The basic variable loan can be convenient for first-time buyers who want to keep their costs low.

Low-Doc Loan

This type of loan is designed for borrowers who have difficultly demonstrating consistent income, such as people who have their own business and/or self-employed.

To apply for this type of loan, borrowers usually need to submit a signed declaration of income, the registered business name and Australian Business Number (ABN), 12 months of Business Activity Statements (BAS), letter from accountant, bank statements, old tax returns, and interim financial statements.

Given the lack of assurance of predictable income for self-employed business owners, interest rates for low-doc loans are usually higher than other home loan options.

Construction Loan

This type of loan is made for people who want to build their home. Unlike other options, a construction loan is usually provided in stages, called draw-downs or progress payments, according to the stage and progression of construction. The first stage of the loan is to cover the cost of the foundation, the slab or base for your new home. The second stage covers building the frame of your property. The third stage of the loan takes the construction to ‘lock up’, it covers the cost of building external walls, doors, and the insulation of the house. The fourth stage is repair or installation and is used to pay for all accessories and fixtures in your home, including plumbing and electrical systems. The fifth and final stage of the loan is completion. This stage covers the finishing touches on your home, such as painting, fencing, and landscaping. 

To be eligible for a construction loan and in addition to the usual loan application documents, borrowers must present evidence of construction of the property including the contract, construction plan and required council approvals.

If you want to know more about home loans and which is the best option for you, we are always here to help! Give us a call on 1800 3 PEASY or contact us via our website www.peasy.com.au