Understanding the different types of home loans
Updated: Sep 22, 2020
Deciding which home loan is right for you can be a bit overwhelming and confusing due to the wide range of products available - all with different rates and features. This is where we can help you understand your options and assist you during the loan selection process. We do the research for you and select the best options most suited to you.
See below for an overview of the common loan types available.
Basic home loan
Generally, basic loans are variable loans, but without the frills. Basic loans don’t offer as much flexibility as professional packages, such as offset and free redraw. They may offer an introductory rate, and there are usually no application or ongoing fees. Basic loans are popular for first home buyers and those with straightforward borrowing requirements.
Standard variable loan
Variable interest rates can fluctuate over time. If rates move up or down, your loan interest rate will adjust accordingly. Generally, interest rate movements are determined by the Reserve Bank, however, lenders have recently started independently raising their interest rates for varying economic reasons. Variable loans usually allow you to pay additional repayments, and there is less risk of penalties if the loan is paid out early. This also allows you to redraw from the loan if needed. Additionally, money held in your offset account will 'offset' the balance of your mortgage account, effectively reducing your interest payment. Lenders charge an annual fee on this type of loan.
Fixed rate home loan
Fixed interest rates are locked in for a set period of time, usually between one and five years. If interest rates move up or down, your interest rate is secured. Fixed rate loans can have a downside – you’re limited in making additional repayments (if any), and you may also have to cover potential break costs if the loan contract is paid out during the fixed rate term. After the fixed term, these home loans usually revert to the standard variable rate.
A split loan gives you the option to fix part of your home loan and leave the other part variable, giving you the benefit of both loans in one. This means you can still make extra repayments without being penalised on the variable portion, and gives you peace of mind on the fixed portion, knowing the rate won’t change. Many people tend to go with a split loan to manage some of the risks if interest rates rise.
If you're ready to buy a house or refinance and would like to discuss which loan type is best for you, contact us today.