The 5 different loans you’re likely to meet

There are hundreds of different loans out there in the mortgage marketplace. But fundamentally, they are all based on two things:

• • Principal — the amount of money you borrow.

• Interest — how much you pay to borrow the money. It’s calculated on the outstanding principal.

The differences you’ll come across are the type of loan and the type of features that come with the loan. Here are some of the most common types of loans you’ll find.

Fixed loans
Interest rates and repayments are fixed for a set period, usually between three to five years.

This makes it easier to budget. Find out more about fixed loans

Variable loans
This is the most popular type of loan in Australia. The interest rate (and your repayments) will vary throughout the term of the loan, so they may rise or fall.

The rates are usually lower than fixed rates. Find out more about variable loans

Split loans
This loan can give you the best of both worlds. You fix one part, and let the other part vary according to market fluctuations. Find out more about split loans

Low-doc loans
These loans are mostly for self-employed people who don’t have all the financial documents normally required to get a loan.

A low-doc loan can be either fixed or variable.

The rate is generally higher than a standard variable or fixed loan, but this is usually reduced after a few years if your repayments are on time.

Line of credit
This type of loan allows you to draw from a fixed amount at any time, to pay for whatever you want—which could be shares, renovations, or even a holiday.

It’s like having a credit card with a big limit, but your home still acts as security for the loan.

You only pay interest on the funds you use, but you need strong financial discipline to ensure you pay off the principal as well as the interest.