Loan Types

 
In today’s mortgage maze there are many types of home loans to choose from, including some that have features that help you pay your mortgage off quicker. Here is a rundown of the various types of home loans available in Australia:
 

Basic Variable

  • Low interest rate (lower than a standard variable loan) no frills loan
  • Rate is variable so it generally moves in line with Reserve Bank changes
  • Limited features (e.g. usually no access to offset facilities & more expensive redraw if at all)
  • Most allow extra repayments
  • Most have terms of 25 or 30 years

Standard Variable

  • The most popular type of mortgage
  • A higher interest rate than a basic variable home loan
  • Interest rates can move up or down which will cause your repayments to increase or decrease with the move
  • It is more flexible than a basic variable mortgage thus allowing you to make extra repayments without penalty as well as offering other features
  • Most have terms of 25 or 30 years

Introductory or honeymoon rate

  • Offers a low interest rate usually for the 1st year of the loan. The rate may be fixed, variable or capped
  • Once the honeymoon period is finished the interest rate usually reverts to the institutions standard variable rate
  • The initial low rate offers a chance for you to reduce the principal quickly by making extra repayments
  • Can be a disadvantage if the honeymoon rate is fixed and the standard variable rate decreases during the period
  • An offset facility can usually be used in conjunction with this loan
  • Most banks charge penalties if you discharge these types of mortgages within 3 to 4 years

Fixed Rate

  • Allows you to fix your interest rate, and thus your repayments, for up to 10 years
  • Once the fixed rate period is finished the rate will usually revert to the institutions standard variable rate unless you decide to rollover to another fixed term
  • This is a good loan to be in if rates are rising but if rates are falling you could be out of pocket by thousands of dollars
  • Generally most lenders restrict the amount of extra repayments you can make on fixed rate loans. At most lenders the limit is $10,000 p.a. If extra repayments of more than this amount are paid then break costs may apply.
  • If a fixed rate loan is paid out (including refinanced) during the fixed rate period a hefty break cost may apply.

100% Offset Accounts

  • This is a separate transaction account which is attached to your mortgage
  • The balance in the offset account is deducted from the loan balance before interest is calculated each day therefore saving interest. This effectively means that your savings are earning interest at the same interest rate as the home loan.
  • The offset account is much like a normal savings account (i.e. usually offers ATM access and a cheque book)
  • Available on most banks standard variable and introductory rate mortgages

All in One Loans

  • This is effectively a transaction account and home loan combined
  • Allows you to directly credit your salary to the account and withdraw your funds via ATM’s, EFTPOS, credit card or cheque book, as you need it.
  • An All in One mortgage enables you to decrease your interest expense by keeping your funds in the account for as long as possible
  • The interest rate may be higher or you may be charged a monthly access fee for the privilege

Line of Credit

  • Similar to an All in One loan except that you can draw down on the loan at any time up to the prearranged credit limit
  • This loan has no set term
  • A higher interest rate is usually paid for a line of credit
  • Good for investment purposes
  • A disadvantage is that it is possible for undisciplined borrowers to reduce the equity they have built up in their home
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