PRODUCTS AT A GLANCE

 

BASIC HOME LOAN

Basic home loan is a great option for those who are looking for a simple no-frills home loan with low interest rate and minimal fees.  This product has fewer features and can be less flexible than other loans.  There may also be fees and charges if you decide to switch loans or lenders, or paying off loan sooner.

 

PROS  Interest rates are often half to one per cent below the standard variable rate.

 

CONS  Limited features, less flexibility and possible penalty fees for early loan repayment. Standard

 

 

 

VARIABLE-RATE HOME LOANS

The most popular home loan in Australia is the variable–rate home loan.  A variable home loan interest rate moves up and down with the market interest rates set by the Reserve Bank of Australia.

If the interest rates go up, your mortgage repayments increases, if they go down, your payments are reduced.

 

PROS  Make regular repayments based on the current interest rate. Effective if rates do not rise.

 

CONS  Should interest rates increase, your regular mortgage repayments will rise.

 

 

 

FIXED-RATE HOME LOANS

A fixed-rate loan is a loan where the interest rate doesn’t fluctuate during the fixed period of the loan.  The borrower knows their repayments will remain unchanged during the fixed term.  When variable interest rates rise, a borrower with a fixed interest rate is relatively better off because their rate will remain unchanged.

 

PROS  Fix your interest rate for a specific period, giving certainty to regular repayment amounts.

 

CON  Should interest rates fall you’ll still need to repay your mortgage at the agreed fixed-rate.

There are also potentially high loan break costs payables of you, if you wish to end the fixed-rate term early. Ending the fixed-rate term early includes repaying the loan early and if you switch from one loan to another before the fixed-rate term expires. Fixed-rate loans may also limit additional repayments that can be made during the fixed-rate term.

 

 

 

SPLIT-RATE HOME LOANS

A split loan allows you to borrow part of your mortgage on a fixed interest rate and the remainder on a variable interest rate- all under the one loan product.

The loan can be split in many ways. 

 

The most common is 50/50 splits, 70/30 or 60/40.

 

Split loans are great for borrowers wishing to spread their interest rate risk, particularly in the event of an interest rate rise.  They can better manage their loan by taking advantage of both loan products. 

The fixed rate loan assists with budgeting, since you know the exact amount you need to pay, whereas the variable loan lets you pay as much as you like, provided that you meet the minimum repayment amount.

 

PROS  Fix a portion of your interest rate to give certainty to monthly repayments while also benefit from a variable-rate portion should rates drop.

 

CONS  If interest rates do drop you’ll be left paying a higher rate for your fixed-rate portion. If you break the fixed-rate period early you may be subject to break costs and you may be limited to extra repayments on the loan.

 

 

 

INTEREST-ONLY HOME LOANS

Interest –only loan is a loan in which, for a set term, the borrower pays only the interest on the principal balance, with the principal balance unchanged.

At the end of the interest-only term the borrower may enter an interest-only mortgage, pay the principal, or(with some lenders) convert the loan to a principal and interest payment loan as an option.

 

PROS  Pay only the interest component on your mortgage for a set term. An ideal option for borrowers with an investment properties.

 

CONS  Repayments do not reduce the principal component of your mortgage.

 

 

 

OFFSET ACCOUNT

An Offset account is an account which combines your loan, savings, credit and cheque accounts which is intended to minimise the loan amount and thus reduce the interest payable.

 

An example how offset account works is if the borrower has a $300,000 and $15,000 in the offset account.  Because of the offset account, interest will only be charged against $285,000.

 

By having a decent amount of money in your offset account, helps cut years and thousands of dollars from your home loan.  This is a great way to reduce your loan interest, as well as eliminate the tax bill on your savings.

 

PROS  Savings interest is taxable, no tax is payable where funds are held in offset account as your account balance is used instead to reduce your loan interest, effectively reducing your tax bill.

The interest rate on your offset account is the same as that applied to your loan account.

 

CONS  You may need a minimum balance in the account. There may be higher monthly fees attached to account.