Are you in the process of buying a new home and are looking for the different types of home loans available? There are many different types of home loans available, and mastering each one of them and their suitability in different scenarios can be quite challenging for most individuals. Orange Mortgage & Finance Brokers is a top mortgage broker, finance broker, and home loans provider in Perth. For this reason, we have prepared this article for you. We will look at the different types of home loans available to individuals seeking to purchase new homes.
What are the Different Types of Home Loans?
- Low documentation loans
- Construction loans
- Line of credit home loans
- Investment home loans
- Reverse mortgages
- Owner-occupier home loans
Low Documentation Loans
A low documentation home loan, also known as a low-doc home loan, is a home loan available to individuals whose correct proof of income documents are unavailable. These income detail documents include dividends and rental income statements, pay summaries, and copies of the most recent payslips.
Since these loans have more generous lending restrictions, they often have higher fees and interest rates. Many mainstream lenders do not offer them as compared to investment and owner-occupier home loans.
These are home loans offered by lenders to either doing a major renovation or building a new home. Construction loans are different from regular home loans as they undergo progressive drag-down – covering construction expenses in phases as the construction process progresses. The construction process normally has five to six stages. These stages are:
- Deposit: for paying the contractor to start the construction process
- Base: completion of footings or concrete slabs
- Frame: completion and approval of the house frame
- Lockup: insulation, brickwork, roofing, doors/windows
- Fixing: laundry fittings/tiling, toilet, bathroom, appliances, kitchen cupboards, plaster
- Completion: fencing, cleaning up or the site, paying the builder his final payment
If one of the above stages costs $50,000, the borrower will pay the interest on that $50,000. The rest comes later. Often, construction loans have a higher interest rate than regular home loans.
Line of Credit Home Loans
It is a home loan that the lender offers a borrower against the equity of his/her home. These loans actually can be a feature of home loans – essentially, it is sort of a ‘credit limit’ where the borrower can swap up to a certain amount of the equity he/she has built up in his/her home for cash. The lender sets the ‘credit limit.’ Typically, this home loan is reusable. It means that a borrower can borrow and repay amounts below the credit limit as many times as possible. For this reason, it is similar to a credit card, except that it offers low rates.
This home loan can be used for:
- Buying a car
- Paying for a wedding
- Home repairs and renovations
- Paying for a wedding
- Taking a holiday, etc.
Investment Home Loans
This home loan is for individuals seeking to purchase property for investments. It involves renting out the property and gaining profits after the property rises in value. These loans have stricter eligibility criteria and higher interest rates as compared to owner-occupier loans. It is because lenders consider investors riskier borrowers as compared to individuals seeking a home to live in.
Investors can enjoy tax benefits associated with this type of home loan. It is because the Australian Taxation Office allows investors to claim interest payments as a tax deduction.
It is a type of home loan meant for individuals who are cash-poor but are asset-rich. These individuals are normally above 60 years. It allows them to access their home’s equity. Borrowers have the choice of not making repayments while they reside on the property. However, the lender charges interest on the balance. This loan must be repaid in full plus the interest once the borrower passes away or sells the property.
Reverse mortgages are notorious for creating financial difficulty for the borrower later in life due to:
- Having less money for future needs when the home does not increase in value
- These loans are costly to break
- This loan can affect the borrower’s pension eligibility
Owner-occupier Home Loans
It is a type of home loan available for individuals who will live in the property that the home loan provided will buy. They are the stock-standard home loans offered by different banks and lenders. A variety of individuals can use them, whether you are a refinancer or a first home buyer.
This type of home loan has a lower interest rate than other types of home loans. It is because they finance buying of property that will most likely be the primary residence of the borrower.
As we have seen above, there are many types of home loans available. However, it is crucial to understand each of these home loans and choose the ideal for you.