First home buyers guide: What are the different types of home loans?

Fixed rate loan

Fixed rate home loans mean your interest rate and repayments are fixed for a set period of time, usually between 1-5 years.

Pros

  • Provides more certainty as your repayments remain the same each month for a set period, making it easier to budget
  • If interest rates rise, your repayments are not affected as the interest rate on your loan is fixed

Cons

- If interest rates drop during your fixed period, your repayments will remain the same as you do not benefit from changes in interest rates

- Many fixed rate loans do not allow extra repayments, or you may be charged a fee for making extra repayments

- Break costs can be high if you decide to refinance your fixed rate home loan

 

Standard variable rate loan

One of the most popular types of home loans in Australia, the interest rate is variable and moves either up or down in line with interest rate rises/decreases.

Pros

  • These types of loans often offer additional features for borrowers, such as offset accounts, redraw and additional repayments
  • If the interest rate drops,  so does your monthly repayment
  • You have the option of making additional repayments on your home loan, usually at no extra cost

Cons

- If the interest rate rises, your repayments will increase and this could put you under increased financial pressure

- As the interest rate is variable, there is a lack of certainty over your repayments which could make budgeting difficult

- Additional features means you pay a higher interest rate versus a basic variable loan

Basic variable rate loan

A basic ‘no frills’ product with a variable interest rate, without the additional features of a standard variable loan.

Pros

  • Carries a lower interest rate than a standard variable loan, making it a good option for first home buyers wanting to keep costs down
  • If interest rates drop, so do your loan repayments
  • Suits borrowers who just want a simple loan product

Cons

- Lacks flexibility and additional features such as an offset account, extra repayments and redraw

- If interest rates increase, so do your monthly repayments

As you can see, both variable and fixed rate loans have advantages and disadvantages.  Some people choose to split their home loan by fixing a portion of the loan amount, whilst keeping the rest variable.

Want to know more?

Your local Perth mortgage broker can help you choose the best home loan option to suit your individual needs.  If you would like to find out more, please contact us on (08) 9277 9888, or click on the ‘Contact Us’ button at the top of this page.

Posted in: Home loans

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