You wouldn’t buy clothes that don’t fit, and it’s the same with home loans. With a wide variety to choose from, it’s important to select the type of home loan that’s the right fit for you.
Not sure about the different types of home loans available? Check out our rundown of loans, and discover what sets them apart to narrow down the choice.
Basic home loan
Basic home loans often come with a very competitive rate, and while you may not get all the bells and whistles – you won’t pay for loan features you’re unlikely to use with a higher rate either.
Pluses: Competitive rate plus some key loan features.
Downsides: May not have as many features or the flexibility of a standard variable rate loan.
Standard variable rate loan
Standard variable rate home loans are the most popular type of loan among Australian home buyers, and with good reason. The interest rate is ‘variable’ meaning it can move up or down, in line with market rates, so your monthly repayments will also fluctuate over the life of the loan. A big attraction is the possible wealth of features available with a standard variable rate loan, which can include a linked offset account, unlimited redraws and options to split between fixed and variable rates.
Pluses: A good selection of features and flexibility to manage your repayments and pay off the loan sooner.
Downsides: May come with a higher rate than a basic home loan.
Offset home loan
An offset home loan is linked to a separate savings or transaction account. When monthly loan interest is calculated, the balance of the linked account is deducted from (or ‘offset’ against) the balance of your home loan. So, if you have a loan of $300,000 and $50,000 in the linked account, you’ll only be charged interest on $250,000 meaning more of each repayment goes towards paying down the loan when you’re making principal and interest repayments. It’s a great way to use spare cash to get ahead with your home loan. Even better, the cash in the linked savings or transaction account is available for you to access.
Pluses: Lets you put spare cash to work to save on loan interest costs and potentially pay down the loan sooner.
Downsides: Offset loans can come with a higher rate so unless you have a reasonable balance in the linked account, you could pay more in overall interest charges. Your local Aussie broker can let you know if an offset is right for you.
Fixed rate loan
Unlike a variable rate loan where the interest rate you pay can fluctuate up or down, a fixed rate loan lets you lock in the rate for a set term, usually between one and five years. Your repayments will remain the same during the fixed term, which is great for budgeting. However, you’ll miss out on the savings of lower repayments if market rates fall.
Pluses: Protection against rising interest rates. Set repayments that are easy to budget for.
Downsides: Fixed loans tend to be less flexible, and many do not allow additional repayments or limits may apply to additional repayments. If market rates fall, you could pay more than necessary on your home loan.
Split rate loan
A split rate home loan lets you divide your loan between fixed and variable rate components. It can offer the best of both worlds – the certainty of a fixed rate plus the flexibility and features of a standard variable rate.
Pluses: Provides some protection against rising rates while the variable rate portion of the loan will capture the savings of any rate cuts.
Downsides: You may not be able to apply extra repayments to the fixed portion of your loan.
With an interest-only loan, the monthly repayments are comprised only of loan interest – there is no reduction of the loan balance. This can lower your repayments, which frees up extra cash. However, the loan balance will remain unchanged and this can mean paying more in interest costs over time. Most lenders permit interest-only repayments for a set term after which the repayments revert back to principal plus interest.
Pluses: Lower monthly repayments than for a principal plus interest loan.
Downsides: Your loan balance will remain unchanged during the interest-only period, which can mean paying more in long term interest charges. It can come as a financial shock to manage higher repayments when the loan reverts back to principal plus interest payments. Interest rates on interest-only loans may also be higher than on principal and interest loans.
Package home loan
A package loan lets you combine a number of financial products with the same lender including a home loan, everyday account and credit card. Many package loans charge an annual ‘package fee’ however the trade-off is a discounted home loan rate plus savings on other financial products.
Pluses: The savings of an ongoing discount on your home loan rate plus savings on other financial products.
Downsides: The expense of the annual package fee – be sure to weigh up the cost versus the savings.
With so many home loans to select from, expert advice is essential. Your local Aussie broker can explain the type of home loan that’s right for your lifestyle – and your budget, to help you achieve your property goals.
You may also be interested in Which mortgage is right for you?, What to look for in a new mortgage and 5 things I wish I’d known before buying (without a broker).