The home loan market is overflowing with catch-phrases and complicated jargon. But if you only have room left in your brain for one more lesson – make sure you know the difference between the different types of loans available. This could save you time and money in the long run.

Variable Rate Loan

Variable rate loans generally have a low interest rate and allow you to select some additional features. These loans are popular with borrowers because they allow you to pay the going rate, which goes up and down depending on the official cash rate set by the Reserve Bank.

There are also ‘basic variable rate’ loans available, offering a lower interest rate but usually without any additional features.

Introductory Rate Loan

An introductory Rate loan gives you a discount on the standard variable rate for a set period of time. This can be a great way to ease yourself into the role of mortgage-holder, but it’s important to compare the rate that the lender will charge you when the honeymoon period is over.

Fixed Rate

Fixed rate loans offer a guaranteed interest rate for a period of time – usually 1 to 5 years. This can be an excellent safeguard if you’re on a tight budget and worried about interest rates rising. Keep in mind, though, the interest rate will be higher than a variable rate.

Construction Loan

Construction loans allow you to borrow in stages, depending on how much work has been done to construct your home. Rather than making repayments on the entire amount and also having to rent while you build, this loan allows you to borrow what you need to pay the builder as they reach specific milestones.

Low / No deposit loans

These loans allow you to get into the property market even if you don’t have enough saved for a sizeable deposit. It’s important to keep in mind that you will still need to pay some costs involved with the transaction, such as stamp duty, conveyancing costs and moving costs.

And if you haven’t been able to save anything towards a deposit, try to be honest with yourself about whether you can realistically afford to pay off a mortgage right now.

Low-doc

Designed for self-employed people, low-doc loans allow you to borrow without using the same methods to prove your income. Often these loans have a higher interest rate, and generally you can’t borrow more than 80% of the property value.

Credit Impaired / Non-Conforming

Non-conforming loans allow people to get back into the game even if their credit history is not great, or they don’t meet lender’s criteria for other reasons. These loans come with high interest rates due to the risk involved for the lender.

Line of Credit

A line of credit is like having a big overdraft on your mortgage. You can use this feature to save a lot of money on interest, because if you deposit everything into your loan you can access the funds whenever you need them, as well as any equity you have acquired.

This option is best suited to people who have good financial habits, and can avoid the temptation to go on a wild spending spree.

Equity Release

Also known as a reverse-mortgage, equity release loans allow you to borrow some of the equity in your home while you still live there.

This option is popular with retirees, but it’s important to make sure that the lender wont’ allow you to chew up all of the equity in your home. Ask about a ‘no negative equity guarantee’.