Understanding home loan types and rates

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Once you’ve decided you are going to buy, you’ll need to start the search for the right home loan. This can be a daunting task that gets more confusing when confronted with the different types of loans that lenders offer.

‍Variable rate loan

Your interest rate and repayments can go up and down over time. Many banks will have basic variable (no additional features/limited flexibility) and standard variable (with some additional features and flexibility).

The good

Repayments decrease when the interest rate goes down.
Basic Variable – Often cheaper as you aren’t paying for additional features
Standard variable –Extra repayments can be made without fees and there are often extra features, like a redraw facility.

Things to consider

Repayments will be higher when interest rates go up.
Basic variable – Limited flexibility in the conditions of the loan. E.g. you may not be able to make extra repayments on your loan to pay it off early
Premium variable – More expensive than a basic home loan because of greater flexibility and features.

Fixed rate loan

You will pay the same interest rate and repayments for a fixed period of time – often 1 -5 years.

The good

The interest rate will not rise above the agreed rate.
Your repayments remain constant so budgeting is easier.

Things to consider

Repayments will remain the same if interest rates go down.
A Break Fee (BF) may be payable if you make repayments additional to your scheduled repayments, including repaying your loan or switching to another type of loan, while your loan interest rate is fixed.

Split rate loan‍

Part of your loan will have a fixed rate and part of it will have a variable rate.

The good

Allows you to take an “each way” bet on interest rate movements.
You can fix a percentage of your home loan to make budgeting easier while also taking advantage of a decrease in interest rates with the variable portion of your loan.
Usually have the ability to pay off your home loan faster without fees.

Things to consider

For the fixed component of your loan, your repayments won’t decrease if the interest rate falls
For the variable component of your loan you may see repayments go up if the interest rate rises.

Guarantor loan

A family member agrees to be responsible for the loan amount, should you be unable to make your repayments. It is often used to borrow more than 80% of the purchase price as it lowers the risk to the bank. This type of loan still requires you to select a fixed, variable or split loan.

The good

You are able to borrow more than 80% of the purchase price, reducing the cost of Lenders Mortgage Insurance
For first home-buyers this can help get a foot in the door when home ownership seems out of reach.

Things to consider

The person who acts as a guarantor will be fully responsible for your mortgage if you cannot make your repayments, potentially putting them in financial hardship.