Choosing Your Loan

It’s important that you consider what will best suit your needs now, but will also offer flexibility into the future.

Some of the things to consider when choosing a home loan are:

Whether to have a Variable or Fixed Interest Rate (or both)

With a variable rate loan, the interest rate is likely to fluctuate throughout the term of the loan, and therefore your repayments will also fluctuate.

To safeguard against interest rate rises you can fix your interest rate for a period of time. This option gives you the peace of mind of knowing what your repayments will be during this period and that there won’t be unexpected changes.

The benefit of a variable rate is that you can usually make extra repayments into your loan to reduce the interest payable and hopefully the term of your loan. With fixed rate loans, there can be limitations on the amount of extra repayments you can make. Fixed rate loans are locked in, so if interest rates go down, you may end up paying more than you would if you have variable rate. However if rates go up and you have a fixed rate you’ll be ahead.

Some banks, like Victoria Teachers Mutual Bank allow you to split your loan into variable and fixed. This way you can take advantage of the benefits of both options; to safeguard a portion against future rate rises whilst also being able to make extra repayments into the variable portion.

Ultimately, you need to assess your options and make a decision based on what you’re most comfortable with.

Extra Home Loan Features to consider

There are a number of additional features that can save you money and time paying off your mortgage:

  • Offset Facility
    An offset facility gives you the ability to use your savings to reduce the interest on your loan. An offset account is a transaction account that can be linked to your home loan, the account balance in this transaction account is deducted from the home loan balance and you are only charged interest on the reduced amount, thereby reducing the effective interest rate.
    For example, if the amount borrowed is $200,000 and the balance of the nominated offset account is $20,000, interest will be calculated on $180,000. Keep in mind, offset is not usually available during fixed rate periods and interest is not separately earned on the savings account. Find out more
  • Redraw Facility
    Redraw is a feature available with most home loans. When you pay extra funds into your loan above the required minimum repayments, the additional funds can be withdrawn at a later stage. This allows extra repayments to be made to reduce the interest payable on the loan, whilst allowing future access to these funds if required. Some lenders will charge for redraw so it’s important to check fees and charges associated with features on your loan and aim for a redraw facility that won’t cost you.
  • Introductory rates
    Some lenders may provide introductory or ‘honeymoon’ interest rates for a specified period. While these may be attractive, make sure you keep an eye on any fees or interest rate changes once this period is over to ensure your loan is still competitive and meets your needs.
  • Fixed Rate Break Costs
    There is usually a limit on the value of extra repayments you can make towards your loan during a fixed interest rate period. If you plan to make additional repayments with a fixed rate, investigate the extra repayments limit and any charges associated with exceeding this limit, to avoid any costly surprises as these can vary dramatically across different lenders.
  • Repayment Holidays
    Some lenders may offer the ability to stop making repayments for a short period of time, for example a Family Repayment Pause of between 3 and 6 months if the borrower goes on maternity or paternity leave and doesn’t have funds available through their redraw facility. Conditions may apply so check with your lender.
  • Home Loan Packages
    Some lenders will offer packages which include discounted rates and access to other benefits such as discounted credit cards. There may be a small fee associated with these packages so it’s important to enquire about fees and charges associated with the package, so that the cost does not exceed the benefit.
  • Interest Only Repayments
    In some cases you can opt to only pay the interest charged on your loan, however interest only loans are not available to owner occupiers. Interest only repayments will reduce the amount of your repayments during the interest only term, however the principal balance remains the same and will affect the repayment amount you will pay when the interest only term is over. This option is often of particular interest to property investors, as the interest cost may be tax deductible against any income generated from the property. Interest only options can usually be applied to variable and fixed interest rate loans.  

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