It is rare for someone to be able to buy a property without having to borrow money from a lender to supplement any savings they may already have. Borrowers seek finance, be it for their place of residence (owner occupier) or an investment property.

There are numerous varieties of mortgage loan types available to consumers. The fact is, there are so many that consumers may become overwhelmed when deciding which one is the best fit for their situation.

The following are some of the most common home loans types for residential property:

Variable Rate Loans

Variable-rate mortgages (VAR) have an interest rate that may change periodically depending on changes in the corresponding Standard Variable Rate that's associated with the loan. Generally speaking, your repayment will increase or decrease if the index rate goes up or down.

When might a variable Rate Loan make sense?

• If you think interest rates may go down in the future

• You want the flexibility to move your loans if you find a better value offer for your situation

• No break or exist fee if you plan to payout the loan earlier then the contracted term

These may seem like a gamble to some, yet majority of the borrowers opt for this because Variable Rate Loans usually give them the ability pay your loan faster through things like extra repayments, a redraw facility and an offset account:

• Extra repayments benefit – this allows you to pay more than your regular monthly repayments, saving you money on the interest of the loan and shortening the length of time you will have to pay it off.

• Redraw facility – Once that you’ve made additional payments to your loan, you can then withdraw some of the money you've already repaid again without refinancing, which can be used in purchasing a new car, a family holiday or a home upgrade

• Offset account – a linked account which allows you to save interest payable on your loan balance

Fixed Rate Loans

A fixed-rate mortgage means your mortgage interest rate – and your total repayment of principal and interest – will stay the same for the agreed fixed term of the loan. This offers you consistency that can help make it easier for you to set a budget.

When might a fixed rate make sense?

• If you think interest rates could rise in the next few years and you want to keep the current rate

• If you prefer the stability of a fixed principal and interest payment that doesn’t change your repayment so that you can manage your finance better

Because homeowners have a fixed repayment amount, there's less trouble thinking about whether or not you can afford to pay the loan. On the other hand, you can’t enjoy the other benefits of a variable loan (extra payments, etc.) and it can be difficult to switch to another home loans, as lenders often charge a break cost fee.

Interest Only Loans

This is a popular choice for property investors who are looking for negative gearing benefits, as well as those hoping to make a profit by selling the property within 5 years of purchase, provided it hasn’t lost value. This strategy matches, the interest-only arrangement, which is usually five years. After that, the borrower will have to start paying down the usual principal and interest repayment.

Guarantor Loans

If you're looking to borrow more than 80% of the purchase price and don't want to pay for lenders mortgage insurance, your parents or potentially other immediate family members may be able to go on the application as your guarantor and use a portion of their home as a security blanket for your own mortgage (if there is enough equity in their property) – an option to consider if you’re a first time buyer eager to get your foot into the property market.

It's important to make sure you have a proper discussion with your guarantor(s) about this though, as they can be responsible for your debt and the banks will go after their property if you default on the loan and the foreclosure sale of your property did not payout the loan balance owed.

Low Doc Loans

Also known as ‘low documentation loans’, this is sometimes useful for contract workers, business owners, or self-employed people who don’t have their tax returns in order. –Usually, an income declaration from an accountant and other financial statement, such as bank statements and business activity statements (BAS), may be enough to assess the capacity of the borrower.

Low-doc loans generally carry higher interest rates and fees compared to other loans.

Line of Credit Loans (LOC)

Also known as ‘home equity loans’, these enable borrowers to take advantage of their mortgage to buy items that need short-term financing. The amount depends on the equity you have on your property as the total borrowing cannot exceed 80% of the properties value.

LOC makes a great substitute for margin loans if you buy and sell shares as it allows you to draw down on the LOC when buying and repaying on the sale of the shares. The advantage of using a LOC secured by your house for investment purposes is the rate is much lower than alternative funding.

It's important to note that these kinds of loans are not for impulsive borrowers. After drawing from your line of credit, you will need to make interest payments for the drawn amount. Basically, a LOC is a big credit card secured by your house and should be used for income earning investments where possible.

Non-Conforming Loans

Non-Conforming Loans are suited to people who are credit impaired and want to borrow more than 80% of the home’s value. Although they’re similar to low-doc loans because neither uses the standard loan paperwork, it would be a mistake to confuse them.

A non-conforming home loan is simply a term used for home loans that don’t typically conform to the major banks' standard loan criteria. It is the opposite of what’s called a ‘prime’ home loan. Listed below are some qualifies for non-prime lending;

•   Self-employed

•   Recently started a business or a new job

•   Don’t have a perfect credit history

•   Been previously bankrupt

•   Have an ATO debt you need to payout

•   Work means you regularly change jobs, it looks like there’s no stability but it’s just the nature of the industry

•   You’re nearing retirement and the major lenders won’t have a bar of you