Choosing a Mortgage that’s Right for You

Posted on June 10 · Comments

There are thousands of loan products on the market these days and it can be pretty confusing deciding which one is the right one for you. Here is an overview of some of the types of home loans available.

Basic Variable Home Loan

This is your no frills home loan. It features:

Low interest rate (lower than the standard variable rate)
Variable rate – the rate and therefore your repayment can change when the Reserve Bank changes the cash rate.
Limited features for example may not have redraw facilities or offset accounts or may charge you extra for these facilities
Most allow extra repayments
Up to 30 year term
May have high break costs

Standard Variable Home Loan

This is the most popular home loan choice. It features:

Slightly higher interest rate than your basic variable home loan
Variable rate – the rate and therefore your repayment can change when the Reserve Bank changes the cash rate.
Extra features such as a mortgage offset account or redraw facility
More flexible with extra repayments
Up to 30 year term

Fixed Rate

A fixed rate loan allows you to fix the interest rate and therefore your repayment usually for 1-5 years.

Fixing your interest rate gives you the certainty that your repayments won’t change over the fixed period, making budgeting easier.

Features of a fixed rate include:

Stability of repayments
If interest rates are increasing, a fixed rate will protect you from interest rate rises and therefore higher repayments.
On the other hand, if interest rates are falling, you could end up paying more than the standard variable rate.
Usually reverts to a standard variable loan after fixed period is over
Many institutions cap the amount of extra repayments that you can make on your loan
You may be penalised if you pay out your loan (refinance) during the fixed period
Fixed rate loans generally have limited features such as no redraw facility

Split Rate Home Loan

A split rate loan gives you the ability to hedge your bets and fix the interest rate on part of your loan while keeping the remaining portion at the variable rate.

This can enable you to protect part of your loan against future interest rate rises and whilst taking advantage of falling rates on the other portion of your loan.

A portion of your loan may also benefit from the features of a variable loan such as allowing extra repayments.

On the other hand, there may be different costs involved for each portion of your home loan.

Introductory or Honeymoon Rate

An introductory or honeymoon rate loan offers a guaranteed low interest rate for an initial period usually for the 1st year of the loan. The rate may be fixed, variable or capped.

Once the honeymoon period is over, the interest rate usually revert to the standard variable rate, which means your payments will increase at this time.

Features:

The honeymoon rate offers a chance to reduce the principle quickly by making extra repayments, saving you interest in the long run.
Or it allow first home buyers a chance to redirect funds in the first year of home ownership to buying things like furniture.
It can be a disadvantage however, if the rate is fixed and the standard variable rate drops during the honeymoon period.
Some institutions offer an offset account with the loan
Penalties may apply if you discharge (refinance) the loan within the first few years.

Offset Account

An offset account is a separate transaction account that is attached to your mortgage. The balance of savings in this account will offset the balance of your mortgage, effectively reducing the balance and therefore the interest calculable on the loan, saving you money.

While you don’t earn any interest on this account, you are “effectively earning” the same amount of interest as you are paying on your mortgage and this is tax free.

However, some institutions will charge a higher interest rate and higher fees for this facility.

Loc Doc / No Doc Home Loan

Doc stands for documentation. Applicants only have to sign a declaration – no proof of financials is required. It is suited to investors or self employed people who may not have or wish not to share income records.

This type of loan often comes at a price, with higher interest rates, higher fees and higher mortgage insurance.