Know your options - the loan cheat sheet

There are a lot of home loans out there. It isn’t quite as simple as deciding you need a loan, and going out to get just any one. To help you understand the difference between your options, we’ve listed the variations in this cheat sheet.

Variable-rate loan:

The interest rate varies over the life of the loan. If interest rates rise, you pay more, and vice versa.

Fixed-rate loan:

The interest rate is locked at an agreed rate over the specified term (usually one to five years). This means repayments remain the same until the end of the term where the loan will transfer to a variable rate or you can choose to refinance.

Split loan:

You can choose to have a portion of your loan with a variable rate and the remainder with a fixed rate. This can enable you some certainty with the fixed rate, but access to features attached to a variable-rate loan.

Packaged loan:

You have the option to package your home loan with other banking products such as an offset account, credit card, car loan, savings account and insurance (home and contents, car, etc). These can offer discounted rates however often come with a package fee charged annually.

Introductory rate loan:

Also referred to as ‘honeymoon rate loans’, these offer a lower interest rate for a short period (such as a year) before converting to a standard variable rate.

Principal and interest repayments:

This is where your repayments go toward paying off the principal (which is the loan amount) as well as the interest charged on the loan.

Interest-only repayments:

Some lenders may enable you to only make interest repayments, without paying down the principal, for a set period of time. This could help lower the repayments, however it means you are not making progress toward paying off your home loan principal.

Construction loan:

These are designed for people who are building a home. The lender will provide the money in instalments as it is needed for each stage of the construction. You only pay for interest on the amount you’ve drawn down and these loans are often interest-only for the first year while the construction is underway.

 

There are also a few options that can accompany the loan, potentially helping you to pay it off sooner. These are:

Offset account:

This is attached to the home loan but sits separate. Any money you deposit into your offset account counts towards money paid off for your loan, meaning you don’t need to pay interest on that amount. However, it usually is accessible, so you can withdraw it if you need to. These more commonly accompany variable-rate loans and can come with fees.

Redraw facility:

This enables you to make extra repayments toward your loan (which reduces the amount of interest you pay), but also withdraw any additional repayments you made if you need it.

Additional repayments:

Some loans allow you to make additional repayments toward the loan. Doing this could save you thousands of dollars in interest.