Home Loan Information
Types of Home Loans & Home Loan Features
The following information on home loans (aka mortgages) and home loan features will assist you to understand the differing types and styles of home loans and home loans features that are available. Please note that the home loan features available with the varying types of home loans may vary slightly between lenders.
The Australian Mortgage industry is constantly evolving and home loan product variations, special rates and limited offers come and go regularly but theoretically there are only 2 types of home loans – The Standard Amortising Home Loan and Line of Credit Home Loan.
All other home loans referred to as Basic, No Frills, Fixed, Variable, Introductory, Honeymoon, Capped, Stepped, Split, Offset, Low Doc, No Doc, Construction, Investment, P & I, Interest Only, Bridging, Non Conforming and No Deposit are variances of a Standard Home Loan that have been specifically styled by the lender to cater to a specific borrower usage, need or purpose and then labeled accordingly to represent that purpose and/or the lender’s marketing strategy. In some cases they may involve a combination or mixture of both the standard home loan and line of credit.
Standard Home Loan
A Standard Home Loan is traditionally an amortising loan which means that the loan balance must be repaid in full or to zero by systematically calculated repayments proportioned over the term of the loan i.e. 30 yr loan term will require 360 monthly repayments which reduce the loan balance to zero by the end of the 30yr term. Most lenders are flexible with the loan term with most offering 5 – 30 yr terms and some a 40 yr term.
A standard home loans repayments are payable monthly and are by default a Principal & Interest (P&I) repayment where each repayment consists of an amount of principal and an amount of interest with the principal component reducing the loan balance by a systematically calculated amount each month effectively finalising the loan by the end of the loan term.
A Line of Credit (LOC), unlike an amortising loan which has a reducing loan balance, can have the same loan balance for the entire term of the loan. Only payments of interest, not principal, are required during the loan term but full repayment of the loan is still required by the end of the term i.e. An LOC with a 20 yr loan term would require 239 monthly payments of Interest Only and full payment of the loan balance owing on the last day of the loan term.
Commonly referred to as a ‘Revolving Line of Credit’, this type of loan gives the borrower a maximum limit to their loan and allows them to readily deposit or withdraw funds as they choose provided the loan balance does not exceed the limit. It allows much greater flexibility for the borrower than a standard home loan and usually offers extra features such as access to funds via cheque book, telephone /internet, BPay, ATM, EFTPOS and linked Credit Card.
When a lender refers to their LOC as being ‘Evergreen’ they are stating that their product is a true LOC in the sense that the loan limit and Interest Only (IO) repayments will remain in place for the entire loan term. Some lenders do not have a true LOC product and advertise a featured up standard home loan with Interest Only repayments as a LOC. Be cautious of these products as they convert to an amortising loan with a P& I repayment after an initial IO period i.e. 10 yrs and the LOC limit steadily decreases in line with the amount of principal payment included in the P&I repayments.
Possibly the biggest advantage of a Line of Credit is the ready access to money. This makes it attractive to Investors and highly suitable for Mortgage Plans and Rapid Mortgage Reduction. A Line of Credit will usually have a higher interest charge (approx. 0.25%) than that of standard home loans.