The range of home loans available in this day and age is truly staggering, and the different types of home loans available to consumers can be really confusing. This article is designed to, very simply, educate you on the differences between the various types of home loans available to you.
Variable Interest Rate
This is the most common type of loan issued by banks and other lenders. Variable loans generally give the customer more flexibility, and the ability to pay out their loan without any break fees. The downside to a variable interest rate is that your bank has the option to increase/decrease the interest rate at any time, which will affect your monthly repayments. The term “Standard Variable Rate” or SVR is thrown around quite a lot too, this is just an interest rate used by many banks as a reference point when comparing home loan products – you will see this used a couple of times through this article.
Fixed Interest Rate
A fixed interest rate is exactly what it sounds like – the interest paid on the loan is a fixed amount over a fixed period of time, for example: a 3 year fixed rate home loan at 3.99% will give you certainty in knowing exactly what your repayments will be for the first 3 years. At the end of the 3 years, the interest rate will default to that lenders SVR (unless otherwise specified) – at which point you can look at fixing it again, changing products, or leaving it as is. The major downside to a fixed interest rate is the lack of flexibility: should you choose to sell or refinance your house during your fixed period, you will be forced to pay the banks a “Break fee”, which can be very substantial (I have seen break fees above $30,000!).
Introductory (or Honeymoon) Rates
Banks often use introductory rates to entice new customers with a cheaper interest rate for a set period of time after the setup of their loan. For example, a 2 year introductory rate of 3.75% will give you very low repayments for the first 2 years (the interest rate is still variable, however), but will usually default to the SVR at the end of the 2 years – at which point you can request your bank reduces your rate, or look into refinancing to a cheaper interest rate.
Basic Home Loan
A basic home loan usually has a low interest rate, and minimal fees, but lacks the features of its more expensive counterparts. A basic home loan is a great option for many borrowers, as it will often be the cheapest option. Some examples of people that may not want a basic home loan are:
- Someone constructing their house: A basic home loan may not allow for construction, or may charge fees at each stage during the construction.
- A regular investor: Someone that has multiple investments, or plans to buy and sell often, is probably better suited to a Professional Package (See Below).
- Someone with a lot of surplus cash: An offset account, or redraw, would be invaluable to this type of customer – something that is not available on many basic home loan products. I will write an article on offset accounts and redraw in coming weeks.
This type of home loan generally provides all the flexibility and features you could want in a home loan, for one annual fee. I have my home loan under a professional package because with it I get the following:
- A 100% transactional offset account.
- A discount off the SVR.
- No fees on my other transactional accounts.
- No fees on the Credit Card of my choice.
- 10% off various insurances.
And whilst this isn’t the cheapest option, it’s very easy and convenient for me to have all my banking, loans and insurances taken care of under the one package, with just the one annual fee. It’s not something that will suit everyone, but some people, like myself, will find this suits them perfectly.
There are other types of home loans, but the above mentioned are what you will come across the vast majority of the time. If you still have no idea what any of this means, or what would be best for yourself, please talk to your broker or banker (or me J).