What Are Different Mortgages Permitted By Australian Laws?

November 11, 2021    propertylawyersperthwide
What Are Different Mortgages Permitted By Australian Laws?

There are many different types of mortgages offered in the Australian business market. That is why the borrowers need to understand all the terms and conditions available before borrowing a specific product. Understanding all these features helps the borrowers select the most suitable options according to their requirements. Before you proceed, you may consult a certified mortgage lawyer in Perth. But before that, read this blog to know the different types of home loans permitted by Australian laws.

The Most Common Types Of Home Loans

The most common mortgages in Australia include fixed-rate, interest-only, and variable-rate home loan products. Each of them has distinct advantages and disadvantages.

Fixed-Rate Home Loans

For fixed-rate home loans, the interest rate remains the same for a specified period, usually 1 to 5 years. Once the term ends, the borrower can select another fixed term.

Fixed-rate loans can be lower or higher compared to the variable rate loans offered in the market. Lower fixed rates allow the lenders to believe in a potential drop in the variable rates in the future.

Advantages Of Fixed-Rate Home Loans

  • The fixed interest rate remains the same over a definite period. So, when market interest rates increase, borrowers have to pay much less than those with variable-rate home loans.
  • When you choose a fixed-rate home loan, you know your repayment will not change until the expiration of your term. It will give you more confidence while drafting a future budget.

Disadvantages Of Fixed-Rate Home Loans

  • If the interest rates fall, the borrowers will need to pay more interest compared to those having a variable rate loan with the same loan amount.
  • Borrowers need to pay higher fees.
  • If you want to change your loan before the term expires, no break fees will be involved.
  • Some fixed-rate home loan products restrict the borrower’s ability to complete additional repayments.

Interest-Only Home Loans

If you borrow an interest-only home loan, you will be only required to pay fees and interest for a maximum of 5 years. During this time, no reduction in the principal amount is involved. When the interest-only period ends, the loan usually reverts to a standard P and I (principal and interest) repayment arrangement until the borrower repays the complete outstanding balance.

Advantages Of Interest-Only Home Loans

  • Compared to standard P and I loans with the same initial amount, borrower repayments are lower.
  • Because the principal amount does not decrease, borrowers having investment properties can claim tax deductions for their interest-only financing arrangements.
  • Borrowers can also use their interest-only loans for short-term reasons like bridging. Bridging finance helps borrowers buy a new property when they are waiting for funds after selling one of their existing properties.

Disadvantages Of Interest-Only Home Loans

  • As the principal does not decrease during the interest-only period, borrowers have to pay a much higher repayment for an interest-only loan that eventually gets converted to a P and I arrangement.
  • Once principal repayments are added at the termination of the interest-only period, borrower repayments considerably increase. It occurs because the usual period for the P and I repayment is shorter. For example, a 5-year interest-only period on a standard 30-year home loan decreases the P and I repayment term to 25 years. In that case, borrowers have to make sure they will make these repayments once they get converted to P and I. Failure to do so will lead them to sell their property.
  • Unlike P and I mortgage products, setting up any equity or ownership in the properties within the interest-only period is not possible via repayments. Borrowers can only build equity when the property value increases. Also, if there is a financial decline in the market, the property may lose its value.
  • Rates on interest-only home loan products are higher compared to that for standard P and I loans. Borrowers may also find it challenging to obtain approval from lenders. It occurs because the Australian Prudential Regulation Authority restricts the amount of interest-only loans that lenders provide to up to 30% of their approved mortgages. This restriction is aimed at limiting the speculative investment amount in the property market.

Variable-Rate Home Loans

Depending on market conditions, interest rates fluctuate. Once the rates increase, borrower repayments also increase. In the same manner, borrower repayments decrease when there is a reduction in the interest rate. However, when reduction occurs, borrowers can maintain their previous repayment level to repay their debts faster.

One key factor that controls the fluctuation of the home loan interest rates is the increase or decrease in the official cash rate of Australia, which the Reserve Bank sets. It is reviewed by the bank authority every month, depending on both the Australian and global economic scenario.

Advantages Of Variable Rate Home Loans

  • Compared to borrowers with a fixed rate home loan, those having a variable rate home loan get highly benefited when the interest rates decrease. They have to pay much lower interest rates.
  • These home loans have more features than fixed-rate home loan products, like redraw facilities and offset accounts.
  • Fees are also much less.
  • If you want to change your variable rate home loan product to a fixed-rate one, no break fees will be involved.

Disadvantages Of Variable Rate Home Loans

  • You will need to pay more interest rates if you hold a variable rate home loan when interest rates increase.
  • Unlike fixed-rate home loan borrowers, variable-rate home loan borrowers cannot have enough advantage to plan a future budget.

Other Types Of Home Loans

There are also some specific types of mortgage products, including:

  • Second mortgage
  • Construction
  • Debt consolidation
  • Guarantor
  • No-deposit
  • Offset

Choosing any home loan type can be a key decision for your future finances. As the market is significantly competitive, you may get confused about analysing the conditions. In that case, a property lawyer in Perth can be the best person to serve you.

Final Words

It may be difficult to locate the best property lawyer for your matter. We recommend clients get in touch with the top-rated law consultancies for contacts. Whoever person you select, make sure they have an impressive record in their field of profession.

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