Loan Types

How many types of mortgages are there? 

There are quite literally thousands of home loan products on the market for a range of different purposes. Having this many options can be overwhelming, leading many to rush into making a bad choice. And like a bad relationship, the wrong home loan can have a significant impact on your finances and your standard of living.

Different home loans will be more beneficial (and often required) for certain circumstances, so it’s worth knowing which type of home loan can be used for what purpose.

To help you navigate through this vast landscape, we have provided a brief overview of the main types of home loans and how they operate.

The different types of home loans 

The following types of mortgages are commonly used around Australia:

• Owner-occupier home loans
• Investment home loans
• Low-doc home loans
• Line Of Credit loans
• Construction loans
• Bridging loans

  – Owner-occupied home loans

Owner-occupier home loans are designed for those who plan on living in the property they purchase, rather than acquiring it as an investment for rental purposes. These home loans are the standard option available and can be obtained as either variable or fixed rate loans.

In general, owner-occupier home loans tend to feature lower interest rates compared to other loan types, such as investment home loans. This is primarily due to the fact that the property will serve as the borrower’s primary residence for many years to come.

  – Investment home loans

An investment home loan is specifically designed to assist individuals in purchasing an investment property with the intention of renting it out and benefiting from rental income and potential property value appreciation over time.

Typically, interest rates for investment home loans are higher compared to loans for owner-occupied properties. Lenders often impose more stringent eligibility requirements and perceive a greater lending risk associated with investment properties.

Investing in a property can offer various tax benefits, and it is advisable to consult with your accountant to receive specific insights based on your individual circumstances. 

  – Low-doc home loans

A low doc home loan, short for “low documentation loan,” caters to individuals who don’t have sufficient proof of their income.. Typically sought after by self-employed individuals, these loans are designed for borrowers who have the financial means to repay the loan but face challenges in providing conventional income documentation. Despite their eligibility, low doc home loans aren’t offered by all lenders and generally come with higher interest rates and fees, reflecting the increased risk perceived by lenders due to the limited documentation.

When you take out most mortgages you need to provide evidence of your income such as:

• Income details: copies of most recent payslips, pay summaries, dividends, interest returns, and rental income statements for investment properties.

For low doc applicants the lender may offer different options such as:

• An Accountants letter or BAS statements and possibly other variations as well. 

  – Line of credit loans

A line of credit home loan lets you use the equity in your property to access funds as needed. It operates similarly to a traditional line of credit, providing you with readily available funds for various purposes.  It also offers flexibility, allowing you to withdraw funds when required and make extra payments to lower the loan whenever you have available funds. This gives you greater financial control and the ability to manage your borrowing according to your specific needs.

Line of credit loans can be used for all sorts of things like:

• Buying a new car or a caravan
• Buying an investment property
• Your Childs school fees
• Home renovations or repairs
• An overseas holiday
• Helping one of your children buy a home

Line of credit loans tend to be interest-only, but the home loans that offer them often have higher interest rates and administrative fees. 

  – Construction loans

A construction home loan is designed for individuals who are either renovating their existing house or constructing a new home. This type of mortgage allows for progressive drawdowns from the lender as the construction progresses. Construction loans are typically suitable for those building a new home or undertaking a significant renovation project.

The various stages would be as an example:

Interest is charged only on the amount of each drawdown and slowly builds up as the property nears completion. Generally the interest charged for a construction loan is higher than normal home loans.                                      

  – Bridging loans

 A bridging loan is a financial solution that helps bridge the gap between selling your current home and purchasing a new one. It is an additional loan that you apply for alongside your existing home loan. This type of loan provides you with the necessary funds to buy your next property while you wait for the settlement of your first property.

Bridging loans typically have an interest-only repayment structure and are paid off once the sale of your first home is finalised. While the interest rates on bridging loans can be higher, it’s not always the case.

With a plethora of home loan products on the market, having a knowledgeable partner like Peony Finance can provide a significant advantage in finding the right loan for your needs, including one with a competitive interest rate.

Let us assist you in finding the suitable loan that meets your requirements.

Contact Peony Finance today.