While you might be in a rush to get a mortgage to purchase the home of your dreams, it helps to consider the major types of home loans that are available. In this guide, we will review them so you can select the type that will adequately fit your needs…
Variable rate
One of the more common types of home loan is the variable rate mortgage. This type of loan is subject to change over the period of time that it is in effect, with the position of the interest rate being able to rise or fall, which in turn effects the amount that the consumer pays on their mortgage per month. Taking this type of loan is a good bet if you expect the current interest rate that you being offered to fall during the course of the two to five year term of the agreement.
Fixed rate
One of the risks of the aforementioned option is that mortgage rates can also rise over the term in question, leaving the loan holder with higher interest payments to make on their home. Those that expect higher rates in the short term (or those that dislike volatility) often prefer to go with a fixed rate mortgage, which locks in a rate over a two to five year period.
Of course, the risk here is that if rates actually end up falling, the home owner will have to make elevated loan payments while their friends end up enjoying the spoils of lower monthly outgoes.
Split rate
When you compare home loans, you might appreciate the merits of both approaches, but it’s possible that you might not be able to decide on a course of action. If this is the conundrum that you find yourself in, you can divide up your loan payments into two halves and enter into what is known as a split rate mortgage. In this scheme, one portion of your loan is subject to rate fluctuations in the market, while the other portion is locked in at an agreed-to rate for the duration of the deal period.
You might lack the full-on benefits of being right in either scenario (rising rates or falling rates), but this approach will dilute your risk in a market where rate-making policy is uncertain.
Rent-to-own
If the place you are currently renting seems to be a place you might like owning someday, it costs nothing to approach your landlord and inquire on whether they are interested in selling. Instead of getting a traditional mortgage though, you might want to consider entering into a rent-to-own, or a vendor financing arrangement.
In this unorthodox structure, the rent you were previously paying becomes a mortgage payment towards owning the place which you are presently leasing. The risks of adopting this scheme are certainly higher, as many consumer protections under Australian law do not apply to this type of setup, which means that if your landlord defaults on the mortgage that still belongs to him, your payments will evaporate into thin air with nothing to show for your efforts.