Finding the right home loan is as important as finding the right property.
There are literally hundreds of home loans available, with new products emerging all the time.
We can recommend a loan for your particular needs, help you to complete the paperwork, professionally package it with your supporting documents and submit it to your chosen lender for assessment.
Here’s a snapshot of the main types of home loans and some of their pros and cons.
Variable
Variable rate loans often provide additional flexibility and are the most popular type of home loan in Australia. As the name suggests the interest rate is variable and therefore fluctuates with the Reserve Bank of Australia’s movement and the cost of the financial institution sourcing funds to lend. Variable rates are generally broken into two categories by financial institutions: basic and standard.
As the name suggests the basic variable rate only covers the basic home loan features. On these loans you won’t have access to features such as a redraw facility; however this also means the interest rate is generally slightly lower than other loans.
The standard variable rate is traditionally slightly higher than the basic variable, however along with this you receive extra features such as a redraw facility, repayment frequency flexibility, portability and the option to pay in advance.
Variable loans generally require closer monitoring, especially if you overcapitalise and interest rates rise. It is important to make sure that you budget and plan for the future should interest rates rise, to ensure that you are able to meet the required repayments.
Pros
- If interest rates fall, the size of your minimum repayments will too.
- Standard variable loans allow you to make extra repayments. Even small extra payments can cut the length and cost of your mortgage.
- Basic variable loans often don’t come with a redraw facility, removing the temptation to spend money you’ve already paid off your loan.
Cons
- If interest rates rise, the size of your repayments will too.
- Increased loan repayments due to rate rises could impact your household budget, so make sure you take potential interest rate hikes into account when working out how much money to borrow.
- You need to be disciplined around the redraw facility on a standard variable loan. If you dip into it too often, it will take much longer and cost more to pay off your loan.
- If you have a basic variable loan, you won’t be able to pay it off quicker or get access to money you have already repaid if you ever need it.
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Fixed
Fixed rate loans generally have all of the features of a standard variable product; however the interest rate is fixed generally from one to five years. Fixed rate products are great products to help maintain the household budget because the repayments will not change during the fixed period.
However, a fixed rate loan means you could end up paying more if interest rates fall. It is possible to exit the loan agreement if you feel it is right to do so, although lenders will generally charge penalty fees to compensate for any loss in profits they may suffer.
At the end of the fixed period you can decide whether to fix the rate again, at whatever rate lenders are offering, or move to a variable loan.
Pros
- Your regular repayments are unaffected by increases in interest rates.
- You can manage your household budget better during the fixed period, knowing exactly how much is needed to repay your home loan.
Cons
- If interest rates go down, you don’t benefit from the decrease. Your regular repayments stay the same.
- You can end up paying more than someone with a variable loan if rates remain higher under your agreed fixed rate for a prolonged period.
- There is very limited opportunity for additional repayments during the fixed rate period.
- You may be penalised financially if you exit the loan before the end of the fixed rate period.
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Split rate loans
Your loan amount is split, so one part is variable, and the other is fixed. You decide on the proportion of variable and fixed. You enjoy some of the flexibility of a variable loan along with the certainty of a fixed rate loan.
Pros
- Your regular repayments will vary less when interest rates change, making it easier to budget.
- If interest rates fall, your regular repayments on the variable portion will too.
- You can repay the variable part of the loan quicker if you wish.
Cons
- If interest rates rise, your regular repayments on the variable portion will too.
- Only limited additional repayments of the fixed rate portion are allowed.
- You will be penalised financially if you exit the fixed portion of the loan early.
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Interest only
You repay only the interest on the amount borrowed usually for the first one to five years of the loan, although some lenders offer longer terms. Because you’re not also paying off the principal, your monthly repayments are lower. At the end of the interest-only period, you begin to pay off both interest and principal. These loans are especially popular with investors who plan to pay off the principal when the property is sold, having achieved capital growth.
You can either have the traditional Interest Only Loan with monthly interest at the end of the month, this is known as Interest in Arrears. Or you can choose an Interest Only Loan with Interest in Advance, this means you pay 1twelve months interest up front.
It is important to discuss with your Accountant before proceeding with this option.
Pros
- Lower regular repayments during the interest only period.
- If it is not a fixed rate loan, you have the flexibility to pay off, and often redraw, the principal at your convenience.
- Interest in Advance Loans can have some good tax advantages.
Cons
- At the end of the interest only period you have the same level of debt as when you started.
- If you’re not able to extend your interest-only period, you could face the possibility of increased repayments.
- You could face a sudden increase in regular repayments at the end of the interest-only period.
- If you choose an Interest Only in Advance option and you fix for 3 years, then each year you need to find the money to pay the interest in advance.
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Line of Credit
You can pay into and withdraw from your home loan every month, so long as you keep up the regular required repayments. Many people choose to have their salary paid into their line of credit account. This type of loan is good for people who want to maximise their income to pay off their mortgage quickly and/or who want maximum flexibility in their access to funds.
Pros
- You can use your income to help reduce interest charges and pay off your mortgage quicker.
- Provides great flexibility for you to access available funds.
- You can consolidate spending and debt management in a single account.
Cons
- Without proper monitoring and discipline, you won’t pay off the principal and will continue to carry or increase your level of debt.
- Line of credit loans usually carry slightly higher interest rates.
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Introductory and Honeymoon
Introductory or Honeymoon loans are generally popular for first home buyers, however this doesn’t mean that these are the only people who can access these products. Honeymoon loans give individuals a discounted interest rate for generally the first six to twelve months depending on the product. After this period expires, the loan generally reverts to the lenders standard variable product.
Although it may be tempting to take out a Honeymoon loan because of it’s reduced interest rate, it is important to watch out for restrictions or exclusions on other aspects of the loan. Many lenders will limit the availability of features (such as redraw facilities, repayments etc.) to offset the lower interest rate. In some cases this can mean less flexibility over the life of the loan.
Pros
- Lower regular repayments for an initial ‘honeymoon’ period.
Cons
- Loans may have restrictions, such as no redraw facilities, for the entire length of the loan.
- You may be locked into a period of higher interest rates at the expiry of the honeymoon period.
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Loan features
One size doesn’t fit all when it comes to home loans. Make sure you choose a loan with the features and benefits that are right for you.
We can recommend a loan for your particular needs — and take care of all the paperwork.
Here’s a guide to common loan features and benefits.
Interest only repayments
You only pay the interest on the loan, not the principal, usually for the first one to five years although some lenders offer longer terms. Many lenders give borrowers the option of a further interest-only period. Because you’re not paying off the principal, your monthly repayments are lower. These loans are especially popular with investors who pay off the principal when the property is sold, having achieved capital growth.
Extra repayments
If you pay more than the required regular repayment, the extra amount is deducted from the principal. This not only reduces the amount you owe, but lowers the amount of interest you repay. Making extra repayments regularly, even small ones, is the best way to pay off your home loan quicker and save on interest charges.
Weekly or fortnightly repayments
Instead of a regular monthly repayment, you pay off your home loan weekly or fortnightly. This can suit people who are paid on a weekly or
fortnightly basis, and will save you money because you end up making more payments in a year, cutting the life of the loan.
Redraw facility
This allows you to access any extra repayments you have made. Knowing you have access to funds can provide peace of mind. Be aware lenders may charge a redraw fee and have a minimum redraw amount.
Repayment holiday
You can take a complete break from repayments, or make reduced repayments, for an agreed period of time.
This can be useful for travel, maternity leave or a career change.
Offset account
This is a savings account linked to your home loan. Any money paid into the savings account is deducted from the balance of your home loan before interest is calculated. The more money you save, the lower your regular home loan repayments. You can access your savings in the usual way, by EFTPOS and ATMs. This is a great way to reduce your loan interest, as well as eliminate the tax bill on your savings. Lenders provide partial as well as 100% offset accounts. Be aware the account may have higher monthly fees or require a minimum balance.
Direct debit
Your lender automatically draws repayments from a chosen bank account. Apart from ensuring there is enough cash in the account, you don’t have to worry about making repayments.
All in one home loan
This combines a home loan with a cheque, savings and credit card account. You can have your salary paid into it directly. By keeping cash in the account for as long as possible each month you can reduce the principal and interest charges. Used with discipline, the all-in-one feature offers both flexibility and interest savings. Interest rates charged to these loans can be higher.
Professional package
Home loans over a certain value are offered at a discounted rate, combined with discounted fees on other banking services. These can be attractively priced, but if you don’t use the banking services you may be better off with a basic variable loan.
Portable loans
If you sell your current property and buy somewhere else you can take your home loan with you. This can save time and set-up fees, but you
may incur other charges.
So how do I know which loan to choose?
That is one of the most frequently asked questions and something that needs to be carefully considered before jumping in and signing loan documents. Really, it comes down to what you think is right for you. Speaking to a broker is a really great way to find out what loan is most appropriate for you.
A broker won’t force you to take out a product; they recommend a loan that will suit you based on the information you have given them and take care of all of the paperwork and application requirements. If you specifically would like a certain type of loan a broker is able to compare a wide range of them.
When you’re ready, give us a buzz and we’ll start walking you through your options. |
