When working with your mortgage broker and deciding on which is the right lender for your current financial situation your mortgage broker will ask you to decide on the type of loan you want. In this article TRACY KEAREY, Director of Mortgage Advice Bureau, Brisbane outlines three of the options available to you.

When applying for a mortgage it helps to know some of the key types of loans that will be discussed as part of your loan process.

No one type of loan is better or worse than another. Each one depends on your financial needs and your unique situation.

Standard Variable Loans

This is the most popular home loan in Australia.

The interest rates go up or down over the life of the loan depending on the official rate set by the Reserve Bank of Australia and the funding costs and individual decisions of each lender.

Your regular repayments generally go towards paying interest and some of the principal amount of the loan.

You may also be able to choose a basic variable loan, which may offer a discounted interest rate but may have fewer loan features, such as a redraw facility and repayment flexibility.

Pros

  • If interest rates fall, the size of your minimum repayments will decrease.
  • Standard variable loans generally allow you to make extra repayments. Extra repayments can help to reduce the length and cost of your loan.
  • Basic variable loans may not come with a redraw facility, which may help to remove the temptation to spend money you have already paid off the principal amount of your loan.

Cons

  • If interest rates rise, the size of your minimum repayments will increase.
  • Increased loan repayments due to an interest rate rise may impact your household budget. You may wish to take potential interest rate hikes into account when working out how much money to borrow.
  • You may wish to consider how often you use the redraw facility on a standard variable loan. If you use the redraw facility too often, it may impact on the length and cost of your loan.
  • If you have a basic variable loan, you may not have the ability to make extra repayments or the option of a redraw facility. This may impact on the length and cost of your loan.

Fixed Rate Home Loans

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

This means your regular loan 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 a rate you agree with your lender, or you can ask your lender if you are able to move to a variable loan.

Pros

  • Your regular repayments stay the same if the interest rate increases.
  • You may be able to manage your household budget with more certainty during the fixed interest rate period, knowing the repayments for your loan stay the same.

Cons

  • If interest rates go down, your repayments do not decrease. Your regular repayments stay the same.
  • You may end up paying more than you would have if you had a variable loan if interest rates remain higher under your agreed fixed rate for a prolonged period.
  • There is generally very limited opportunity for you to make additional repayments during the fixed interest 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 Home Loans

A split-rate loan means that part of the loan is variable, and part of the loan is fixed.

You agree on the proportion of your loan that is variable and fixed with your lender. A split-rate loan enjoys 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, which may help you to manage your household budget.
  • If interest rates fall, your regular repayments on the variable portion will decrease.
  • You may have the option to make extra repayments on the variable part of the loan which may reduce the length of your loan.

Cons

  • If interest rates rise, your regular repayments on the variable portion will increase.
  • The ability to make extra repayments of the fixed rate portion will generally be limited.
  • There may be significant break costs that you must pay if you exit the fixed portion of the loan early.

If you need assistance applying for a loan or would like to discuss refinancing a loan please give me a call on 0417 738 469.

Tracy Kearey is an award winning Finance and Mortgage Broker with 23 years experience. She has access to over 40+ lenders and offers her clients access to extensive range of loan products and services tailored to individual borrowing needs. If you need assistance with your lending needs you can send Tracy an email or give her a call on M: 0417 738 469. You might also like to connect with Tracy on Facebook

General Advice Warning: This blog is not designed to replace professional advice. It has been prepared without taking into account your objectives, financial situation or needs. You should consider the appropriateness of the advice, in light of your own objectives, financial situation or needs before making any decision as to what is appropriate for you.

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Finance Education Understanding Variable, Fixed & Split Rate Home Loans