Brush up on your Loans: The Loan Type Cheat Sheet
You’d think a loan was a loan, wouldn’t you? But there are actually a surprising number of different kinds and the one you end up with can depend on a range of factors. These can include the risk you pose to a lender, the deposit you have and how much control you want over your repayments.
So if you’re considering a loan, it’s worth running your eye over our little cheat sheet, as it can help you to choose the one that’s right for you when the time comes.
Variable rate loan
The interest rate varies over the life of the loan. If interest rates rise, you pay more, and vice versa.
Fixed rate loan
This is the opposite of a variable rate loan. Your interest rate and repayments stay the same, no matter what. No surprises.
This offers the best of both worlds — you’re able to manage the risk of interest rate fluctuations by making part of your loan fixed while taking advantage of depreciating rates by making part of your loan variable.
On the upside, you can make unlimited extra repayments on the variable portion to reduce the size of the loan faster, but on the downside, you may pay additional fees such as account keeping costs on both fixed and variable components.
Professional packages offer discounts on standard variable and fixed rates, the waiving of fees and in some cases, great deals on other products from the same lender. To be eligible, you’ll need to be borrowing over a certain amount, have the right type of loan and have a low LVR (Loan to Value Ratio).
Just make sure the joining or annual fees aren’t higher than the savings you'll make and that the amount you’ll need to borrow is not greater than you can actually afford.
Designed for people who have trouble getting the necessary paperwork together for a full documentation home loan, this is a great option if you’re self-employed or own a small business.
To be approved, you’ll need to present your application in the most favourable way. This means only providing the documents requested, as any partial evidence of income may require the lender to request full documentation from you. Also, you may be required to pay higher interest rates, a larger deposit and Lenders Mortgage Insurance.
Introductory rate loan
Also known as ‘honeymoon’ loans, these offer a low interest rate for a short period, after which the rate moves to the standard variable rate.
This type of loan can have either a fixed discount rate (a variable which moves with the market at a fixed level below the standard variable rate) or a discounted fixed rate (a fixed rate that doesn’t move for the entire introductory period).
If you already own a property, this is a short-term loan that can help you finalise the purchase of new property before you’ve sold your existing property.
It can have either a fixed or variable rate, but usually has a 6 month loan term and a higher interest rate, if you don’t sell your property within this time frame. For this reason, it’s important to be sure you can afford the repayments of both loans.
Line of credit loan
If you need easy access to cash for renovating or investing consider a line of credit. It lets you draw against the loan balance up to a credit limit set by the lender. Interest is added each month and repayments are not required as long as the loan is within its credit limit.
The downside is that if your financial discipline is poor, this lack of requirement to pay anything other than interest could mean you never actually pay down the loan principal.