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What's easier to find?

A new home or the right loan?

Finding a home is one thing. Finding the right loan is another.

There are hundreds of loan options out there. Different types, lenders and new products launching all the time. We’ll help you make sense of it all and guide you to a loan that actually suits your needs.

Types of home loans and how they work

Here’s a quick look at the main types of loans and some of their advantages and disadvantages.

Variable Rate Loans

Interest rates go up or down over the life of the loan depending on the official rate set by the Reserve Bank of Australia, funding costs and the individual decisions of each lender. Your regular repayments generally pay off both the interest and some of the principal.

Pros

  • If interest rates fall, the size of your minimum repayments will too.
  • Standard variable loans generally allow you to make extra repayments. Even small extra payments can cut the length and cost of your mortgage.
  • Basic variable loans often don’t come with a redraw facility, removing the temptation to spend money you’ve already paid off your loan.

Cons

  • If interest rates rise, the size of your repayments will too.
  • Increased loan repayments due to rate rises could impact your household budget, so make sure you take potential interest rate hikes into account when working out how much money to borrow.
  • You need to be disciplined around the redraw facility on a standard variable loan. If you dip into it too often, it will take much longer and cost more to pay off your loan.
  • If you have a basic variable loan, you may not be able to pay it off quicker or get access to money you have already repaid if you ever need it.

Fixed Rate Loans

The interest rate is fixed for a certain period, usually the first one to five years of the loan.

This means your regular repayments stay the same regardless of changes in interest rates. At the end of the fixed period you can decide whether to fix the rate again, at whatever rate lenders are offering, or move to a variable loan.

Pros

  • Your regular repayments are unaffected by increases in interest rates.
  • You can manage your household budget better during the fixed period, knowing exactly how much is needed to repay your home loan

Cons

  • If interest rates go down, you don’t benefit from the decrease. Your regular repayments stay the same.
  • You can end up paying more than someone with a variable loan if rates remain higher under your agreed fixed rate for a prolonged period.
  • There is very limited opportunity for additional repayments during the fixed rate period.
  • There may be significant break costs that you must pay if you exit the loan before the end of the fixed rate period.

Split Rate Loans

Your loan amount is split, so one part is variable, and the other is fixed. You decide on the proportion of variable and fixed. You enjoy some of the flexibility of a variable loan along with some of the certainty of a fixed rate loan.

Pros

  • Your regular repayments will vary less if interest rates increase, making it easier to budget.
  • If interest rates fall, your regular repayments on the variable portion will too.
  • You can generally repay the variable part of the loan quicker if you wish.

Cons

  • If interest rates rise, your regular repayments on the variable portion will too.
  • Your additional repayments of the fixed rate portion will be limited.
  • There may be significant break costs that you must pay if you exit the fixed portion of the loan early.

Interest Only

You repay only the interest on the amount borrowed usually for the first one to five years of the loan, although some lenders offer longer terms.

At the end of the interest-only period, you begin to pay off both interest and principal.

Pros

  • During the interest-only period, your monthly repayments are lower because you’re not paying off the principal.
  • If it is not a fixed rate loan, there may be flexibility to pay off, and possibly redraw, the principal at your convenience during the interest-only period.
  • These loans are especially popular with investors who plan to pay off the principal when the property is sold. This strategy is usually reliant on the property having achieved capital growth before it is sold.

Cons

  • The overall cost of the loan is likely to be significantly higher.
  • At the end of the interest-only period you have the same level of debt as when you started.
  • If you’re not able to extend your interest-only period your repayments will increase at the end of the interest-only period.
  • You could face a sudden increase in regular repayments at the end of the interest-only period when the loan changes to principal and interest.

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