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Guide to understanding home loans

Selecting a home loan is an essential step in buying property and it’s critical that your loan fits your lifestyle, needs and budget in just the same way as you’d hope your new home would.


Selecting a home loan is an essential step in buying property and it's critical that your loan fits your lifestyle, needs and budget in just the same way as you'd hope your new home would.

The thing is, not all loans are created equal.

With a wealth of features and flexibility on offer, it can be hard knowing which loan is right for your circumstances.

We've cut through the clutter (and cut out the jargon) to explain how each type of loan works, to help you narrow down the choice.

When it comes to home loans, home buyers are spoilt for choice. But despite the marketing names used by different lenders, the majority of home loans fall into one of a few categories.

Standard variable home loan

This is the most popular type of loan among Australian home buyers. As the name suggests, the loan interest rate is variable – meaning it can rise and fall in line with market interest rates set by lenders. That's a plus if rates fall, but if rates increase, your regular repayments will also increase.

Often packed with features, some standard variable rate loans allow unlimited extra repayments, redraw, and the option to use an offset account that lets you put savings to work to pay off your loan sooner.

Upsides

  • If interest rates drop, your repayments will fall also
  • Extra repayments may allow your home to be paid off sooner

Drawbacks

  • Repayments will rise if interest rates climb

Basic variable rate home loan

Also known as ‘no frills' loans, basic home loans come with a lower rate than a standard variable loan though without the same wealth of features. Often a favourite among first homebuyers, a basic loan can make sense if you only want to pay for features you'll use.

Upsides

  • Generally, lower interest rates than the standard variable loans

Drawbacks

  • Tend to be less flexible and have fewer features than standard variable home loans

Fixed rate home loan

A fixed loan lets you lock in your home loan interest rate for a set term, typically 1, 2 or 3 years. This means your repayments won't change regardless of how market rates move, which can make it easier to budget.

Upsides

  • Protection against rate hikes for the fixed term
  • Allows for accurate budgeting

Drawbacks

  • If interest rates fall, you could end up paying more than necessary on your home loan
  • Bailing out before the fixed term ends can often see you hit with hefty costs
  • Often have limited, if any, ability to make extra repayments

Split rate home loan

A split rate loan lets you divide your home loan between fixed and variable rate components. This can be a way to enjoy the best of both worlds – the certainty of a fixed rate and the flexibility and features of a variable rate loan.

Upsides

  • You won't feel the full impact if interest rates move higher
  • The freedom to make extra repayments on the variable portion of the loan.

Drawbacks

  • If interest rates rise, repayments on the variable part of the loan will increase
  • If interest rates fall, repayments on the fixed rate portion of the loan will remain at the higher fixed amount

Package home loan

A package loan can combine a home loan, a transaction account and often a credit card to give home owners the convenience of holding their main financial products with one provider. Along with a discounted home loan rate that lasts for the life of the loan, package loans can also offer savings on other financial products. In return, borrowers pay an annual package fee.

Upsides

  • Often offer generous savings, including an ongoing rate discount
  • The convenience of having multiple financial products with just one institution

Drawbacks

  • On smaller home loans, the annual package fee can outweigh the interest savings

Introductory rate home loan

These loans offer a very low rate for an introductory period, often the first year of the loan. Do read the fine print though to understand how the rate will change once the low-rate honeymoon is over.

Upsides

  • Savings on repayments during the introductory period can help to offset home purchase costs like stamp duty and legal fees

Drawbacks

  • Loan repayments will increase after the introductory period<b/p>

With so many loans to choose from, it pays to seek expert advice on the loan that is right for you now – and in the future.

Contact your mortgage broker today for the home loan that's your perfect match.

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Posted in: Home loans

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