Home Loans Guide, Step 3 of 7, Type

Borrowers experience many emotions when buying a home. Most of them are positive but one of the most common emotions is also fear – fear of selecting the wrong home loan. So how do you know which type of loan is best for you?

We’ve tried to help with your decision by laying down some pros and cons for popular loan types.

Fixed Mortgage

Pros – Fixing your interest rate guarantees that your repayments will remain the same for a set period of time and gives you protection against rate rises. The upside to this is that it will allow you to budget more accurately as your regular repayments will remain consistent and will not be impacted by cash rate fluctuations.

Cons – If interest rates do decline, you will miss out on the savings because your rate will not change. Also, fixed rates are usually higher than variable rates because you are paying for the security that your rate won’t move for the set period of time.

Variable Mortgage

Pros – Variable rates generally follow the Reserve Bank of Australia’s official cash rate. If the cash rate falls, your variable rate is likely to decrease and so will your repayments. Variable interest rates are also generally lower than fixed rates.

Cons – If interest rates rise, so will your repayments. As such, variable rate loans are harder to budget for as your repayments may differ from month to month depending on whether your lender increases or decreases your interest rate.

Split Mortgage

Pros – This is where you have a portion fixed and a portion variable. You share some of the benefits of each and are never 100 percent wrong.

Cons – On the flipside, you also get some of the downsides!

Low Doc

Pros – Do you own a business or have you just started a new job? A low doc home loan is designed for people who can’t provide the usual paperwork required when applying for a loan. With a low doc home loan you usually won’t need to provide pay slips and tax returns however you must state your income and be able to prove that you can meet the repayments.

Cons – Usually with this type of loan the interest rate is higher than regular home loans. You may also be charged additional fees such as ‘risk fees’. Low doc loans are considered a higher risk loan for lenders so they may ask you to provide other assets, such as your car, for security against the loan.

Walk through the complete Home Loans Step by Step guides below;

Home Loans Guide – Step 1 of 7 – Amount
Home Loans Guide – Step 2 of 7 – Purpose
Home Loans Guide – Step 3 of 7 – Type
Home Loans Guide – Step 4 of 7 – Deposit
Home Loans Guide – Step 5 of 7 – Features
Home Loans Guide – Step 6 of 7 – Application
Home Loans Guide – Step 7 of 7 – Fees & Charges

Compare home loans in Australia