Variable
rate home loans are subject to interest rate
movements. This means that the interest rate
on your loan is subject to change by the
lender.
There
are many type of variable loans
There are many lenders offering hundreds of
products; however, we have tried to simplify
the different types of products to help you
make your decision.
Of the 2,000 plus products on the market we
have broken them down into six major
categories:
▪
Compare Rates
▪
Basic Variable or 'no frills'
loans
▪
Variable Home Loans with a Redraw Facility
▪
Variable Home
Loans with Offset Accounts
▪
Line of
Credit Loans
▪
Fixed
Home Loans
▪
Split
Rate Loans
▪
Professional
Packages
Each of these categories is explained along
with the major advantages and disadvantages
associated with each product.
Basic or 'no frills'
loans
Many lenders offer a class of home loan
that has a lower variable interest rate than
their standard variable rate loan. The trade
off is that these discount loans generally
have less flexibility and fewer features,
for example, no extra repayments can be
made, the repayment level cannot be varied
or there is no redraw is available.
What to watch out for:
▪
The ability to make
extra repayments
▪
Low upfront fees
▪
Little ongoing fees or
no fees
Advantages
▪
Low interest rate
Disadvantages
▪
May not be able to make
extra repayments
▪
You can only pay monthly
▪
You cannot redraw any
extra repayments made
▪
You must have at least a
20 per cent deposit plus government charges
▪
Generally only available
for loans between $100,000 and $400,000
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Basic Home Loans with
a Redraw Facility
This home loan allows you to make additional
repayments on your mortgage and then have
access to the additional repayments if you
need to. Make sure you understand the
conditions attached to the redraw facility
that can include a minimum redraw amount and
a fee every time you use it.
What to watch out for:
▪
Additional repayments
are excellent for reducing the interest paid
and the loan term
▪
Fees – look for loan
products with nil redraw fees
▪
Minimum redraw amount –
look for low redraw minimums
▪
Number of redraws – look
for unlimited redraw transactions
▪
Lenders allowing direct
salary crediting into your loan account so
you can redraw the funds as
you need them
Advantages
▪
Extra repayments can be
redrawn and used for any purpose
▪
Reduces the interest you
pay on your home loan
▪
Usually cheaper than
loans with an offset account attached
▪
A mortgage reduction
program can be helpful in managing this type
of loan
Disadvantages
▪
Loan may have fees and
minimum amounts which can add to the cost of
your loan
▪
Can be inconvenient
having to access your funds via this
facility
▪
Most fixed rate loans do
not allow you to redraw from your loan
account
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Standard Variable Home
Loans with Offset Accounts or All-In-One
Loans
Offset account loans
– This is a separate account linked to your
loan that operates like a normal cheque
account where salaries go in and funds come
out via cheque book, ATM or EFTPOS. The
interest earned on this account is applied
to reduce the interest on the mortgage.
All-in-one account loans
– Similar to an offset account but your loan
account is your account for everyday banking
purposes.
Loans that have an offset account attached
can help reduce your tax bill by offsetting
taxable income from deposit accounts against
interest paid in after tax dollars on
mortgage repayments.
What to watch out
for:
▪
Partial offset accounts
where only a percentage of the money in the
offset account reduces
the interest cost
of the loan. In some cases it may be better
to invest your savings elsewhere
or place them into
your loan and redraw them later if required
▪
Added fees and charges
associated with an offset account
Advantages
▪
Can be used like an
everyday bank account with access to an ATM
card or cheque book
▪
By depositing your
salary and savings into this loan you reduce
the interest charged on your
mortgage
▪
Reduces the interest you
pay on your home loan
▪
Very convenient
▪
A mortgage reduction
program can be helpful in managing this type
of loan
Disadvantages
▪
Extra costs for having
an offset account
▪
Most fixed rate loans do
not come with an offset account
▪
Partial offset accounts
are not as advantageous
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Line
of Credit Loans
With
this type of loan you can access funds up to
your approved limit at any time. Your salary
can be paid directly into the loan account
and you can access the balance of the loan
at any time – just like a credit card. You
can use these funds to purchase shares, go
on holiday, buy a new car, start home
renovations and so much more!
▪
Money is easily accessed
by cheque or ATM card linked to this loan.
You can use it for living
expenses or for other
investments
▪
By depositing your
salary and savings into this loan you reduce
the interest charge
▪
Extra repayments are
allowed at any time
▪
A mortgage reduction
program can be helpful in managing this type
of loan
▪
Ease of withdrawal means
that if you are undisciplined this loan can
get out of control
▪
The interest rate is
usually higher than traditional Variable
Rate and Low Frills loans
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Fixed Term Loans
This loan has a set interest rate for a
period of time. This means you know exactly
what your repayments will be for your fixed
rate term.
What to watch out for:
▪
Most products do not
allow redraw, however, there are some
lenders that allow for this
▪
Some lenders limit the
amount of extra repayments you can make or
allow no extra
repayments at all.
Look out for products with unlimited
repayments
▪
Offset accounts are
generally not attached to a fixed loan. Look
out for products where you
can attach an
offset account
▪
Fixing the interest rate
for a period of time insures against future
rate rises
▪
It is easy to budget for
the same regular repayment each month
▪
If interest rates fall
you may pay more for your loan than
borrowers on variable rates
▪
Most lending
institutions penalise you for making
additional repayments
▪
You may be penalised if
you pay off your home loan before the due
date
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Split Rate Loans – Fixed
and Variable Interest Rate
▪
Having part of your loan
at a fixed interest rate protects you
against interest rate rises
▪
Leaving part of your
loan on a variable interest rate leaves you
less vulnerable if rates reduce
▪
Additional payments are
allowed on the variable portion of the loan
▪
You may be charged
set-up fees, account fees and discharge fees
on both the fixed portion
and the variable
portion
▪
You may be penalised for
making higher repayments on the fixed
portion
▪
You may be penalised if you pay off your
loan before the due date on the fixed
portion
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Professional Packages
For one yearly fee you can purchase and
maintain multiple loans under the one package.
You also receive a discount off the standard
variable rate depending on your total
aggregated loan amount. Other advantages
includes discounts on insurance and credit
card fees.
There can be significant
savings made when you add up all the benefits associated with this package.
▪
Have multiple loans all
under the one package
▪
Choose any loan product such as fixed rate,
variable, line of credit and interest only
loans
▪
Discounts on the standard variable rates
▪
No application or valuation fees
▪
Discounts on other financial products
such as banking, credit cards and insurance
▪
Yearly fee can be between $300 and
$400 depending on the lender
▪
Some lenders only have a few loan
splits and may restrict the products
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