The most common type of loan in Australia is the standard variable loan. The official rate set by the Reserve Bank of Australia and funding costs determine how the interest rate will go up and down over the life of the loan. Some of the interest and the principal will be paid off with your regular payments.
There is the potential to get a variable loan that has fewer loan features but will offer you a discounted interest rate. This is called a basic variable home loan
- When the interest rate falls, the size of your minimum repayments will also fall. If you want to cut the length and cost of your mortgage a Standard variable home loan give you the freedom to make extra payments to achieve this
- If you choose a basic variable loan option you will not have features like a redraw facility. This will prevent you from spending more you have already paid off your loan amount.
- In contrast to the positives, if interest rates rise the amount of your regular repayments will also rise.
- With an increase in the amount you have to repay your household budget can also be affected.
- If you choose a standard variable home loan you will have to control how much you use your redraw facility. There is the potential to increase the length of your loan and the cost of your loan if you choose to draw funds using the redraw facility.
- The basic option of a variable loan does not let you make extra payments to pay off your loan quicker.
A fixed interest rate loan means that your repayments will not fluctuate with a change in the interest rate. A fixed rate is set for a certain length of time. At the end of that time you can decide if you will fix the rate again, depending on what your lender is offering, or change over to a variable home loan.
- Even if the interest rates change your repayments will stay the same. You are in a better position to manage your household finances as you know for the fixed period what your repayments will be.
- Your repayments will stay the same even if the interested rates go down. This means during your fixed rate period you might pay more than a person who has a variable interest rate.
- During the fixed rate period there is usually a smaller opportunity to make additional repayments, limiting your chances of paying your loan of quicker.
- If you exit your loan before the fixed rate period finish you may be penalised by your lender.
Split rate loans
A split rate loan is a combination of both a variable and fixed rate loans. You choose how much of your loan will be at set at a fixed interest and how much will be on a variable interest.
- When the interest rate changes there will be less fluctuation on your regular repayments.
- If the interest rate falls you will still be able to benefit as the repayments for the variable component of your loan will also fall.
- You have the opportunity to make extra repayments on the variable component of your home loan.
- The regular repayments on the variable component will rise if the interest rate rises.
- You are limited on how many extra repayments you can make on the fixed rate component of your loan.
- You will still be penalised on the fixed rate component of your loan if you exit early.
As the name indicates, instead of paying off both the principal and the interest your repayments will only pay off the interest. These types of loans are usually only offered in the first 1 – 5 years of a loan although there are some lenders that offer longer periods. At the end of the agreed period your repayments will again cover both the interest and the principle.
- During the interest only period your repayments will be smaller.
- If it is a variable loan, you have the opportunity to pay off and redraw the principal when you choose.
- Even though you make regular repayments once the interest only period is up you will end up with the same level of debt.
- When the interest only period ends there is the real chance that your repayments amounts will go up.
- When the interest only period ends you could have to make more regular repayments.
Low doc loans are usually picked by people who cannot provide the usual documentation or proof needed to show they have a steady income, for example self-employed people. As there is more perceived risk low doc loans usually come with a higher interest rate so it is usually generally recommended to go with another loan type where possible.
- Less documentation / proof about levels of income required.
- May over look bad credit rating.
- A higher perceived risks means there is usually a higher interest rate.