Loan Types Explained

Finding the right home loan can be damn near impossible and a ‘tad’ tedious if you don’t work in the industry. Here at Vault Plus Mortgages we’re here to help you cut through the smoke and mirrors and compare your options quickly for you.

Trying to ‘go it alone’ the first thing you’ll discover is the sheer volume of different home loans on offer. Will a Fixed Rate or Variable Rate loan be the right fit for you? Is it best to split your loan? Should you have an offset account or keep things simple with just a redraw facility? The questions are endless, but you get the idea.

So to narrow it down, we’ve put together some helpful tips and advice on the most common types:

Fixed Rate loan

As what’s written on the label, this loan will lock in your interest rate for a term that you choose usually between one and five years. Your repayments will remain fixed regardless of changes in official cash rates, making this an attractive option for first home buyers in need of some certainty or those wanting to stick to a strict budget.

The Pluses:

  • Repayment Certainty — You’ll have cash-flow certainty. During your fixed term, you’ll know the exact amount to repay every month. This makes budgeting a whole lot easier, especially for first time homeowners and people on modest incomes.

The Minuses:

  • Limited flexibility — Generally, fixed rate loans do not offer the same flexibility as variable rate loans. For instance, there are limitations on the amount of extra repayments you can make on Fixed Rate loans.
  • Break fees — You may have to fork out some ‘break costs’ fees if you need to repay this loan before its fixed term ends so think carefully about your short to medium term plans before entering into a Fixed Rate loan.

Rate Lock – What The ?

When you apply for a Fixed Rate loan the actual Interest Rate that will apply will be the banks Fixed Rate at the time of settlement of your loan (not necessarily at Application stage). So conceivably you could apply for a 3 Year Fixed Rate loan of 4% but if the banks 3 Year Fixed Rate increases between application stage and when settlement happens then you would receive the (higher) Rate at settlement – a real bummer eh. So what is this thing called Rate Lock ?

Rate locking is a form of insurance if you like that can be applied to your fixed rate home loan. This handy feature will let you set and ‘lock in’ the interest rate of your home loan (at the time of application) and this generally holds until settlement has occurred. That way, you can avoid any interest surges before the big day.

What happens if rates go down I hear you ask? Then generally the lender will apply the reduced or lower Fixed Rate.

What’s the damage?

In most cases the rate lock fee is typically 0.15% of the loan amount. There are a few lenders that offer Fixed Rate loans without a Rate Lock fee and this will be a consideration of the team at Vault Plus Mortgages when recommending the most suitable lender for you.

Like we said, Rate Lock is a form of insurance and is best applied in a rising (interest rate) market. Even though the fee might be substantial it might save you thousands over the term of the home loan.

Variable Rate loan

This is the go-to loan for most homebuyers. Variable Rate lending make up about 75% of all lending in Australia. It’s typical characteristic is that the interest rate fluctuates with changes in interest rates. So when these change, your prevailing home loan rate and repayments will change too.

The Pluses:

  • You can pay off your home loan sooner and save money on interest by making some extra repayments along the way without penalty.
  • A Variable Rate loan comes with Redraw which will enable you to ‘access’ any extra loan repayments if the need arises.
  • Refinancing your home loan is always an option for you with a Variable Rate loan, with no early repayment penalties or break fees. (However government charges and a Discharge fee may apply with a refinance).

The Minuses:

  • The big one is when rates increase and your home loan is subject to these rate and repayment increases. The team at Vault Plus Mortgages has got some strategies to help manage against rate rises so just ask us how.

Basic Home Loans Vs Home Loan Packages

Within the scope of Variable Rate loans you will typically find Basic Home Loans and Home Loan Packages.

The former, as the label suggest is a ‘no frills’ home loan. It still comes with Redraw and Internet Banking but they typically don’t have other features such as an Offset Account that sometimes really isn’t required. The upside of Basic Home Loans are that they usually attract a slightly cheaper interest rate as you’re not paying for features you don’t need.

Who are Basic Home Loans best suited to ? First Home Buyers or people with large Home Loans (relative to their incomes) as a Basic Home Loan gives the home owner more ‘bang for their buck’ to drive down the home loan quicker by way of a cheaper rate and absence of many fees.

More and more Aussies are choosing to take on their home loan as a package deal. For an annual Package Fee, you can have a fee free Offset Account and a credit card with no annual fee and discounted insurance. But the real game changer of these Home Loan Packages is the discounted home loan interest rate it usually offers.

Before you rush to apply for a home loan package, lets make sure it is the right deal for you and consider the following:

  • To be eligible, your home loan needs to exceed a certain amount. This minimum limit is usually $250,000.
  • You will be charged an annual package fee ranging from $350 upwards, depending on your package and lender.
  • You may not need nor want a credit card
  • You may actually incur more debt at credit card interest rates, which are notoriously high.

Split loan

If you want the flexibility AND certainty that a Variable and Fixed Rate loan would provide, then a third option is to divide or split your home loan. This way you will have the certainty of repayments of the portion that you ‘Fix’ and you will enjoy the flexibility or extra repayments for the portion that is Variable.

Of course the million dollar question is – how much do I Fix and how much do I make Variable. I have written an paper on this exact question, but because this is something that will be specific to YOU, connect with us here at Vault Plus Mortgages and we’ll happily provide you with our considered advice and a copy of the article.

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