Choosing the right loan
This first home owner journey is a whirlwind of education and excitement. And now it’s time to think about the right loan for your home! You’ve possibly heard about basic, standard, offset, fixed, split, interest only and package loans. But what are they and which one is right for you? Check out our rundown of loans and discover what sets them apart to narrow down your choice.
Basic home loan
Basic home loans often come with a competitive rate, and while you may not get all the bells and whistles – you shouldn’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 a 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, which means your monthly repayments may 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 your loan 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 and if interest rates move higher then so too will your repayments.
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. It sounds more confusing than it is! Put simply, if you have a loan of $300,000 and $50,000 in the linked offset account, you’ll only be charged interest on $250,000 so you pay less interest. 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, though check with the lender about any restrictions or limits on this.
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.
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 could miss out on the savings of lower repayments if your lender reduces interest rates.
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. You could also face break costs if you want to end the fixed term early.
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 may 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. Some lenders permit interest-only repayments for a set term, typically five years, 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 typically 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 choose from, expert mortgage advice is essential. Your local Aussie Broker can help you understand the type of home loans available and find the one that’s right for your lifestyle – and your budget.
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- Chapter One : Getting started
- Chapter Two : Your Dream Home
- Chapter Three : Money Matters
- Chapter Four : Ways to Purchase
- Chapter Five : Understanding Interest Rates
- Chapter Six : Understanding Home Loans
- Chapter Seven : Lending Sources
- Chapter Eight : Getting Your loan
- Chapter Nine : Choosing a Home
- Chapter Ten : Steps to Settlement