- Principal and Interest (P&I) loan: Your repayments cover both the principal (the amount you borrow to buy the property) and the interest (what you’re charged by the lender for borrowing the principal).
- Interest-only loan: You only need to make regular repayments on the interest, not the principal – but remember, fees and charges might apply. Interest-only loans can be attractive for investors who think the property will rise in value. They pay the interest and any applicable bank fees (they may receive a tax deduction for doing so) and, if the property rises in value, they can build their equity without paying a cent of the principal loan amount. But if the property falls in value they may end up owing more than the property is worth because the outstanding loan amount would exceed the value of the property.
- Fixed rate loan: Gives you the certainty of knowing your regular repayments will stay the same for a specific period. You can generally fix the interest rate for up to five years, sometimes longer. At the end of the fixed term you can arrange for another fixed term or move to a variable rate. But if you want to change lenders or pay off your home loan during the fixed term you may be charged break costs.
- Variable rate loan: Your repayment amounts will change when the lender adjusts its rate—up or down. You can pay off your loan early without paying a penalty and you can also transfer your loan to another lender without break costs. Sometimes, a feature called an off-set account can be provided that allows your savings to reduce the balance of your home loan for the purpose of calculating interest charges. It’s a simple tool that can help you save thousands of dollars over the life of your home loan.
- Split rate loan: The certainty of a fixed interest rate and the flexibility of a variable rate in one home loan. You choose how much you repay at variable and fixed rates. You can pay off part of your loan sooner and have some protection against rate increases.
- Basic home loan: Variable home loan without regular fees and offering a low variable rate of interest. But depending on your bank you might face some restrictions, as an example you can’t pay off extra amounts, vary repayments or redraw on your funds.
- Equity loan or line of credit: Allows you to tap into the equity in your account. You can borrow up to an approved limit, and pay interest on the debit balance once you draw upon the funds. Interest rate is slightly higher than a normal home loan.
- All-in-one account: Brings separate accounts—savings, cheque, credit card and home loan—under one umbrella. Usually a refinancing option that allows you to reduce your home loan using funds that would otherwise sit in low-interest accounts.
- Construction or renovation loan: Designed especially for homeowners looking at building a new home or making improvements to their existing home Allows you to draw down money as you need it to make progress payments.
- Reverse mortgage/equity release loan: Allows asset-rich but cash-poor retirees to unlock the equity in their home. Doesn’t involve regular monthly repayments and allows borrowers to continue living in their own home. Lenders only seek repayment when the borrower vacates property. It’s important to check the lender has a ‘no negative equity guarantee’, so repayments won’t exceed the cost of your home.
When you apply for a home loan, your lender will look at your personal financial circumstances to make sure that you can make the repayments. But don’t despair if you have an intermittent income, a lower deposit or a chequered credit history. There are home loans on the market for people in your situation. However, you may need to pay a higher interest rate if the lender is taking on more risk.
Like to know more?
- Go to qandamp.com.au to find the answers to your questions about home loans and property investment.
- Talk through the options with a financial adviser or an accredited mortgage consultant.
- Check out AMP Bank’s range of great-value, easy-to-understand home loans that give you the flexibility to choose what's right for you.
- Use AMP’s home loan repayment calculator to work out your minimum loan repayments for any borrowed amount.
With a little forward planning you could potentially save thousands of dollars and years on your home loan repayments.
It’s back to the past to control the property cycle