Home Loan Types
Variable Home Loans
Variable mortgages are the most popular type of home loan among Australians. Variable home loan interest rates move up and down depending on the Reserve Bank’s cash rate and lender pricing. There are a number of variable rates available to you that you should know about.
Standard Variable Home Loan
The standard variable home loan tends to have more features than the basic variable home loan. These features include the ability to make extra repayments with no penalties during the term or to make the most of a linked offset account. A mortgage offset account acts as a normal bank account for you but this account is linked to your home loan. Any money deposited in the offset account offsets your interest payments on the mortgage.
For instance, a $500,000 standard variable mortgage with an offset account that has $100,000 deposited in it means that you only pay the interest on $400,000 at that point in time.
Basic Variable Home Loan
The basic variable home loan tends to have less features than the standard variable loan. The upside of the basic variable home loan is that the interest rate is often less than the standard variable rates. This is because you don’t have the benefit of the features.
Introductory Home Loan (Honeymoon)
Introductory home loans are mortgages that have considerably low interest rates for a period of time at the outset of the home loan. The lower interest rates are what lenders use to entice you into taking out a loan. However, once the introductory period has ended the interest rate will revert to a higher rate. You need to be aware of what rate the loan reverts to... Luckily for you our system includes this in its calculations.
Fixed Rate Home Loans
Fixed rates are exactly that, they are fixed at a certain interest rate. Fixed rate periods do vary however they tend to be between 1-5 years. Note that this does not mean your home loan will be paid off in 1-5 years, the total loan will extend beyond this often reverting to a variable rate.
Fixing the rates allows you to know exactly what your repayments will be over a specified period. Your interest rate will not be influenced by changes to the cash rate set by the Reserve Bank. Fixed rates give you a level of comfort - you know exactly what your home loan outgoings will be.
Interest rates on fixed loans however tend to be higher than variable loans. Lenders examine the financial climate and lock in rates that they feel reflect where the Reserve Bank’s interest rates are heading. Lenders tend to factor in price changes to the variable rates and therefore you may not always be better off. Furthermore, when variable interests rates fall your fixed rate remains constant.
Fixed rates can also have high break costs that you may not be aware of. If the variable interest rates have decreased substantially during the term of your fixed home loan breaking the loan will result in high exit costs. Lenders will require you to pay out the difference between the fixed rate repayments and the variable repayments over the term.
Line of Credit Home Loans
A line of credit home loan allows you to draw on an amount up to a specified limit at any time or all at once. Basically a line of credit acts like a credit card but with a much higher limit. The line of credit often allows you to draw on the funds at any time from an ATM.
Line of credit provides a large amount of flexibility however you need to be a disciplined individual to make the necessary repayments. Furthermore, the interest rates tend to be higher with line of credit products in comparison with variable mortgages.
Low Documentation Home Loans (“Lo Doc”)
Lo Doc loans do not require the client to produce extensive supporting documentation in order to take out a home loan. Lo Doc loans are often utilised by self-employed borrowers. However, the trade off can result in higher interest rates, lower flexibility and higher deposit requirements.
This guide is general information only and is not product advice. If you need advice on your circumstances you should seek professional financial advice.
