Choosing a home loan is one of the biggest decisions of your financial life, and with so many fees, features, conditions and packages, it's worth a little research to make sure you get the best deal.
Types of home loan
Variable home loans. Your interest rate can change with Reserve Bank rates and your lender's increases (or decreases). Basic variable loans are typically a cheap rate with few features. Standard variable loans tend to have more options (eg, to pay of the mortgage early).
- Repayments drop if the Reserve Bank lowers interest rates
- Variable rates are typically the lower than fixed rates.
- Your monthly repayments can rise if Reserve Bank rates go up (or your lender chooses to raise its rates)
- It's harder to plan your budget without interest rate and repayment certainty.
Fixed rate home loans. You can lock in the interest rate for a period of 1 to 5 years, after which you either nominate another fixed term (at current rates) or switch to variable rates.
- Since your repayments are fixed, you're immune to interest rate rises
- Budgeting is made easier.
- Your interest rate won't fall if official rates drop.
- Additional repayments may be limited with fees and penalties for an early payout.
Introductory home loans. You'll get a market-leading rate for the first year (or so) of your mortgage, before your interest rate reverts to a higher standard rate.
- The lowest rate on the market
- You can pay off the principal while your interest rates are low (great for first home buyers)
- Rates can be fixed once the 'honeymoon' period expires.
- Your market-leading rate will come to an end and repayments will rise
- Your post-honeymoon standard rates may not be competitive with other mortgage offers
- Exit fees could make it hard to get a better deal once your introductory rate expires.
No fee home loans. All those account fees, monthly fees and upfront fees can add up over the life of your loan, so these can be very competitive options.
- No upfront or ongoing fees – although there's often an exit fee
- No fees on options like redraw or extra repayments.
- Interest rates may be higher.
Split rate home loans. Hedge your bets with part fixed interest, part variable mortgage.
- You're not so exposed to interest rate rises
- Your repayments drop if rates fall.
- Loan repayments can still rise with Reserve Bank rates.
Interest only home loans. For the first 1 to 5 years you only pay off the interest, rather than the principal, so your monthly repayments are considerably lower. After that, however, you'll have to make repayments on both the principal and interest.
- Low repayments – allowing you to get a foot in the property market or, eg, make renovations
- A cheap initial option for investment properties, also providing cash-flow and tax management.
- Once the interest only period expires, there'll be a big rise in your monthly repayments
- Interest only loans are significantly more expensive over the full term of the loan.