The following loan types are available for both residential owner-occupiers and investors:
The Cash Rate set by the Reserve Bank of Australia. Two common types of variable rates offered by lenders are:
Basic Variable – the budget choice:
This loan has a low rate with limited features or flexibility. It gives you an ongoing lower rate with the option to use limited features for a fee when you need them. This is ideal for borrowers who are unlikely to use features.
Standard Variable Rate Loans – when flexibility is the key
Take advantage of the features and flexibility of a loan that has all the “bells and whistles” such as flexible repayments
Tip: Review whether the additional features are really beneficial to you, including the interest rate discounts, as the cost of these loans can be higher than a basic variable.
Play it safe by knowing exactly what your interest rate and repayments will be for the fixed rate term which can be from 1 year to 5 years. Some lenders offer longer terms. A fixed rate loan may suit you if you:
- are on a limited income
- need the security of knowing that even if interest rates rise, your repayments will remain the same
- have the peace of mind in having a consistent repayment
When the term concludes, the loan usually reverts to a standard variable rate and you may have the option to roll the loan over into another fixed term. If you pay out the loan during the fixed rate period, it is important to note that you may incur “break costs”, which means you will be charged the economic cost to the lender if rates drop for the remaining term of the loan.
Tip : Note that the fixed rate offered may vary at the time of settlement of your loan. Check the “rate lock” options that some lenders offer if you want to fix the rate at the time of your application.
Take advantage of a lower interest rates for an initial period giving you a head start. These rates can be variable or fixed with the most common term being for 12 months. These loans usually roll over into a Standard Variable Rate.
Tip : Set your repayments at the ongoing roll-over rate so that there is no adjustment when the loan does roll over. The extra payments are principal repayments which reduce your loan in the first year and save you interest in the following years.
A flexible interest only variable rate loan giving you all the freedom you need, including salary crediting, atm access and a credit card attached to the account. This loan is frequently used to assist in minimising interest costs and is an interest only loan. You decide when you will use the available credit and you are only charged when you use the credit.
Tip : This loan can work well for disciplined borrowers. It does not work well for borrowers on a limited income who may find it difficult to pay the loan off or those who have difficulty controlling spending.
Because you combine your mortgage with your banking, your money not only works more effectively, it also makes managing your finances simple. This style of loan is similar to a Standard Variable Rate Loan with a transaction account bundled together. Income from wages and salaries, investment and rental income is directly credited to the one loan account. Expenses are credited from the account using ATM, cheque books, direct debits and credit cards. Unlike a Line of Credit (see above) which maintains an approved credit limit, this is an amortising
loan, meaning that the principal amount of the loan will be paid off over the loan term.
By using the equity in your property, you can raise a loan for any worthwhile purpose at residential rates rather than the higher personal loan rates. Examples are to buy a new car, pay for your children’s education or for investment purposes such as purchasing shares or financing an investment property.
Tip : Try to set up the repayments over a shorter term so that you are not paying for that new car for the next 20 years.
Manage your interest rate risk by splitting your mortgage into two or three different types of mortgages and terms. Choose a combination of products that best suit your needs.