Variable rate loans often provide additional flexibility and are the most popular type of home loan in Australia. As the name suggests the interest rate is variable and therefore fluctuates with the Reserve Bank of Australia’s movement and the cost of the financial institution sourcing funds to lend. Variable rates are generally broken into two categories by financial institutions: basic and standard.
A basic variable rate only covers the basic home loan features. On these loans you won’t have access to features such as an offset account; however this also means the interest rate can be slightly lower than other loans.
The standard variable rate is traditionally slightly higher than a basic variable rate, however along with this you might receive extra features such as repayment frequency flexibility, portability, the option to pay in advance and the option of an offset account.
Fixed rate loans generally have all of the features of a standard variable product; however the interest rate is fixed generally from one to five years. Fixed rate products can be great products to help maintain the household budget because the repayments will not change during the fixed period.
However, a fixed rate loan means you could end up paying more if interest rates fall. It is possible to exit the loan agreement if you feel it is right to do so, although lenders will generally charge penalty fees to compensate for any loss in profits they may suffer.
Introductory and Honeymoon
Introductory or Honeymoon loans are generally popular for first home buyers, however this doesn’t mean that these are the only people who can access these products. Honeymoon loans give individuals a discounted interest rate for the first six to twelve months depending on the product. After this period expires, the loan generally reverts to the lenders standard variable product.
Although it may be tempting to take out a Honeymoon loan because of its reduced interest rate, it is important to watch out for restrictions or exclusions on other aspects of the loan. Many lenders will limit the availability of features (such as redraw facilities, repayments etc.) to offset the lower interest rate. In some cases this can mean less flexibility over the life of the loan.
Interest only loans are particularly popular for investors. The repayments of interest only loans will be lower than an ordinary loan because you only pay the interest charges each month – you aren’t required to pay off the principal.
Some interest only loans are available for owner occupier clients; however these can be risky because your level of debt will not fall during the interest only period. Interest only loans should be a short term option (about 5 years at the most).
Low Doc and No Doc
Low and No Doc loans are increasing in popularity in Australia, especially for the self-employed or contractors. As the name suggests you require less documentation to take out the loan (this is essentially proof of income and other debts etc).
Although it is generally much easier to be found eligible for these loans, it is not always the best way to go. As a result of providing less documentation the bank will generally charge a higher interest rate or additional fees because there is a higher perceived risk with applicants.
So how do I know which loan to choose?
That is one of the most frequently asked questions and something that needs to be carefully considered before jumping in and signing loan documents. Really, it comes down to what you think is right for you. Speaking to PFG’s in house mortgage consultant is a really great way to find out what loan is most appropriate for you.