Property Finance & Home Loans

Variable loans are the most popular home loan in Australia. Your interest rate will go up or down over the life of the loan depending on the individual decisions of your lender.

Each of your repayments generally pays off some interest and some of the principal.

Pros

• If interest rates fall, the size of your minimum repayments will too.
• Standard variable loans generally allow you to make extra repayments. Even small extra payments can cut the length and cost of your mortgage.

Cons

• If interest rates rise, the size of your repayments will too.
• Increased loan repayments due to rate rises could impact your household budget, so make sure you take potential interest rate hikes into account when working out how much money to borrow.

The interest rate is fixed for a certain period, usually the first 1 to 5 years of the loan. This means your regular 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 whatever rate lenders are offering, or move to a variable loan.

Pros

• Your regular repayments are unaffected by increases in interest rates.
• You can manage your household budget better during the fixed period, knowing exactly how much is needed to repay your home loan.

Cons

• If interest rates go down, you don’t benefit from the decrease. Your regular repayments stay the same.
• You can end up paying more than someone with a variable loan if rates remain higher under your agreed fixed rate for a prolonged period.
• There is very limited opportunity for additional repayments during the fixed 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.

Your loan amount is split into 2 loans, one loan will have a variable rate, and the other will have a fixed rate.

You decide on the proportion between variable and fixed. This gives you the flexibility of a variable loan along with the certainty of a fixed rate loan.

Pros

• Your regular repayments will vary less if interest rates increase, making it easier to budget.
• If interest rates fall, your regular repayments on the variable portion will too.
• You can generally repay the variable part of the loan quicker if you wish.

Cons

• If interest rates rise, your regular repayments on the variable portion will too.
• Your additional repayments of the fixed rate portion will be limited.
• There may be significant break costs that you must pay if you exit the fixed portion of the loan early.

You repay only the interest on the loan for the first 1 to 5 years of the loan, although some lenders offer longer IO terms. Because you’re not paying off the principal, your monthly repayments are lower.

At the end of the interest-only period, you then begin to pay off interest and principal.

These loans are especially popular with investors who plan to pay off the principal when the property is sold. This strategy is usually reliant on the property growing in value before it is sold.

Pros

• Lower regular repayments during the interest only period.
• If it is not a fixed rate loan, there may be flexibility to pay off, and possibly redraw, the principal at your convenience during the interest-only period.

Cons

• The overall cost of the loan is likely to be significantly higher.
• At the end of the interest only period, you have the same level of debt as when you started.
• If you’re not able to extend your interest-only period, your repayments will increase at the end of the interest-only period.
• You could face a sudden increase in regular repayments at the end of the interest-only period.

Originally designed for first-home buyers, but now available more widely, introductory loans offer a discounted interest rate for the first 6 to 12 months, before the rate reverts to the standard variable interest rate.

Pros

• Lower regular repayments for the initial ‘honeymoon’ period.

Cons

• Loans may have restrictions, such as no redraw facilities, for the entire length of the loan.
• When the honeymoon rate period ends, you may be locked into an interest rate that is not as competitive as elsewhere.
• Some banks may charge early termination fees if you decide to switch to a new lender.

Popular with self-employed people, these loans require less documentation or proof of income than most, but often carry higher interest rates or require a larger deposit because of the perceived higher lender risk. In most cases you will be financially better off getting together full documentation to secure a lower interest rate loan, but if this isn’t possible, a low doc loan may be your best opportunity to borrow money.

Pros

• Reduced requirements for evidence of income.

Cons

• You will probably pay higher interest than with other home loan types, or may need a larger deposit, or both.