First-time home buyers are spoilt for choice with the types of loans available to meet individual needs and circumstances. It’s also worthwhile keeping in mind that there are a variety of different lenders in Australia, including traditional institutions, like the banks, as well as an increasing number of specialist lenders, private lenders and fintechs. These ‘non-bank’ lenders can be a great source of alternative finance, such as the increasingly popular short-term bridging loans, business loans and caveat loans.
Here are six of the most common loan options available for first-time homebuyers.
1. Low-Doc Loan
A low-doc home loan, as the name suggests, requires minimal documentation. This can be a good solution for self-employed borrowers and investors who don’t have the standard paperwork required, such as proof of employment, payslips, years of trading history, and so forth. Low-doc lenders also tend to be more lenient about bad credit ratings and have more flexible lending conditions. As a result, this type of loan often has higher interest rates and fees, which reflect the lender’s increased risk.
A construction loan is different from a conventional home loan and may suit borrowers looking to build their homes. The funds from a construction loan are paid directly to the contractor, and they are made available in instalments throughout the building process. With regard to interest on the loan, payment starts after the completion of the construction process. The interest charged is only on the amount the lender has released so far.
An introductory loan attracts borrowers with low-interest rates, which are also known as a ‘honeymoon rate.’ These rates, which can be fixed or capped, commonly last for around 12 months. Payments typically increase after the introductory period, though the principal interest rate can be decreased faster if payments are made throughout the introductory rate period. In addition, some lenders offer an offset account against an introductory loan.
A fixed-rate home loan has a fixed interest rate throughout the duration of the loan. This makes loan repayments predictable as they are the same each month. This is a common structure and suits those who like predictability, consistency, and ease of budgeting.
Meanwhile, a variable rate home loan, the most common type of loan in Australia, is more flexible with features like a redraw facility. Its rate fluctuates alongside the cash rate of the Reserve Bank of Australia. In general, when the economy is performing well, the cash rate increases, and it decreases when the economy is weak. A variable rate loan generally follows these broad patterns. As such, with a variable rate home loan, the amount of your repayments decreases when the interest rate falls. When the interest rates increase, your repayments will also rise.
5. Interest Only Home Loan
A first-time homebuyer who’s looking to reduce monthly repayments can consider an interest-only home loan. This loan type requires the borrower to pay down the interest for a set period. But the interest-only period doesn’t last forever (often only for about seven years). After that period, both the interest and the principal amount must be paid back.
A guarantor home loan is a good option for first-time homebuyers who haven’t saved up a deposit of 20%. With this kind of loan, you co-borrow or ask a family member to act as your home loan guarantor. This structure uses a portion of their home or their equity as security for the home loan. The amount that’s secured depends on the guarantor, but it’s usually 5%-10% of the loan amount.
A guarantor home loan can help improve your chances of being approved for a home loan, but your guarantor becomes liable if you default. The worst case is for the lender to foreclose the property of your family member because you’re unable to meet your repayments.
Property prices in Australia continue to increase over recent years, this makes saving for your dream house even harder. A home loan helps get the funding you need to make a purchase, but it’s a long-term debt. That’s why you must weigh up the risks before applying for one. Also, you must deal only with trusted lenders like Mango Credit Reviews. This lending institution is a leading provider of bridging loans and short-term finance across Australia. With the right loan type and a credible lender, buying your first home can be an incredible milestone.