What is the difference?
There are many different lenders and loan types that you can consider and choose. This can include Fixed, Variable, 100% lending, Line of Credit, Principle and Interest and Interest only loans. Looking at the whole loan structure is important, for example, one lender may offer a great interest rate, however they may not have the flexibility of redraw. Also, your future needs should be considered when choosing a loan type so as not to limit your future lending. I have included a brief example of the major loan types, but to get a more detailed description of a loan best suited to you individual requirements, please feel free to contact Daniel Powell on 0423 783 341.
There are many more options and combination of these loans which may better suit your needs, but a basic understanding will help you understand or at least raise some questions for your lending advisor.
Fixed Term Home Loan with Fixed Interest Rate
This loan has a set interest rate for a set period of time. This means you will know exactly what your repayments will be for your fixed term. Advantages of this loan are that the interest rate will not change for your term despite possible future rate rises and it may be easier and more convenient to budget your finances around your fixed repayments. Disadvantages include paying more for your loan if interest rates fall below your fixed rate, and generally, you can not make extra repayments, if you do, some lending institutions will penalise or charge fees.
Home Loans with Variable Interest Rates
This is the most common loan in Australia, in fact most fixed rates will default to a variable loan after the fixed loan term expires. These loans have repayment periods of up to thirty years. Advantages for this type of loan include facilities such as Offset or Redraw, and Extra repayments are usually allowed at any time. Disadvantages include the interest rate may be subject to fluctuations and rate rises, increasing repayments and the term of the loan.
Home Loans with Accessible Line Of Credit
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 - like a credit card. You can use these funds for any purpose - to purchase shares, go on holiday, buy a new car, start home renovations and much more. Advantages include money is easily accessed by cheque or ATM card linked directly to the loan and you can use the account for a variety of purchases. Also, by depositing your salary and savings directly into the Line of Credit loan, you can help reduce the interest charged quicker. Repayments are generally only required once the loan limit is reached therefore a mortgage reduction programme can be helpful in managing this type of loan. Disadvantages include the loan getting out of control as it is easy to withdrawal directly from the loan. The interest rate is usually higher than traditional Variable Rate and Low Frills loans.