Loan Types Explained

Just when you thought you were getting your head around the requirements of a successful home loan application you are faced with the problem of choosing the right type of loan to suit your circumstances.

When you talk with a banker they are only able to advise you about the range of products provided by the respective bank. Of course, whilst many products are similar across the board, some lenders have specialty loan products that are slightly different from any other lenders and which may be more appropriate for your needs.

The only way you can find out about these products is to talk or mortgage broker who can explain the ins and outs of each loan type and make some suggestions as to the appropriate one to choose.

There are nevertheless various generic style loans that are common to most lenders such as:

Principal and Interest.

Interest only.

Line of Credit.

Fixed Rates.

Split Loan Facilities.

Interest in Advance.

We will explain the intricacies of each of these loans styles later but let's cover some general principles first.

Most borrowers are content with a standard loan which means principal and interest over a 30 year term. This is the most common type of home loan and the one to which most people have become accustomed. But where a borrower’s circumstances are different it may be appropriate to structure a loan package that suits lifestyle or cash flow requirement.

Take for example a young couple who are buying their first home. They are both in steady employment but anticipate that they will be rising through the ranks and earn extra money within the next two years. They may also be planning to have a family in three years time and decide they will save money to tide them over when they are reduced to a single income.

A mortgage broker is the best person to talk to in the circumstances so that the loan can be structured to meet the borrower's changing needs. A suggestion in this instance might be to take out a principal interest facility for the first two years and then examine the possibility of changing to a fixed rate loan or possibly a split loan where they will have part principal and interest and part fixed.

The actual mix would need to be designed to suit the cash flow that applies at the time. The important point at the early stage of the application would be to decide not to take out a fixed rate loan for, say, five years because they would have to deal with the inflexibility which comes with a fixed rate and may find themselves making a difficult situation within three years.

The important part about the process is to think about how your personal circumstances may change over a period of time and then design the loan that will serve those ends and at the same time preserve enough flexibility to make loan management a simple task.

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