Types of interest rates
When choosing the home loan that’s right for your needs, you’ll need to consider how you want to pay back your loan – that is, what type of interest rate do you want? There are different types available, each with their own pros and cons.
Considered a popular type of loan in Australia, a variable rate can change in response to fluctuations to Australia’s official cash rate and any changes made by your lender. This could be up or down so it’s important that you know if your finances could cope with a higher interest rate.
Pros: If the cash rate decreases or your lender reduces rates, your interest rate can go down too, meaning you pay less interest. Generally you are also able to make extra repayments, which lets you pay your home loan off faster.
Cons: If the cash rate increases or market conditions worsen, your rate will usually go up, which means you’ll pay more interest.
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 interest 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.
Pros: Protection against rising interest rates. Set repayments that are easy to budget for.
Cons: 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 and if you want to end your fixed rate period early, you might be required to pay a large fee.
Split rate loan
A split rate, also known as a partially-fixed rate, 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 for part of your loan plus the flexibility and features of a standard variable rate for the other part.
Pros: Provides some protection against rising rates for the fixed portion while the variable rate portion of the loan may capture the savings of any rate cuts. You might also be able to make additional repayments on the variable portion.
Cons: You may not be able to apply extra repayments to the fixed portion of your loan.
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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