Major types of loans
used to purchase real estate in Australia

Standard Variable Loans

Australia's most popular type of home loan. The interest rate can vary throughout the term of the loan - both up and down. The term is usually 20 to 25 years.

Advantages

  • If interest rates fall, your repayments will also come down.
  • You can make additional repayments without incurring a penalty allowing you to pay off your loan faster.
  • A very flexible type of loan, often has more features than other types of loans.

Disadvantages

  • If interest rates rise you will have to make higher repayments.

Basic Variable Loans

Many lenders now offer basic variable loans with lower interest rates than standard variable loans but with fewer features. Like all variable loans the interest rate and your repayments can vary over the term of the loan.

Advantages

  • The biggest advantage is price. Repayments are usually lower than standard variable loans.

Disadvantages

  • Most of these loans do not offer the same range of features or flexibility as standard variable loans.

Fixed Rate Loans

With a fixed rate loan your interest rate and repayments are fixed for a set period, usually between one and five years. Most fixed loans will automatically default to a variable loan at the end of the term, but can rollover to another fixed term.

Advantages

  • When rates are rising it is guaranteed that your interest rate will not go up.
  • You know how much your repayments will be for the fixed period of the loan.

Disadvantages

  • In periods of decreasing interest rates your interest rate will not drop during the fixed term.
  • It is not usually possible to pay extra amounts off your principal without incurring a financial penalty.

  • There can be penalties for changing from a fixed rate loan to a variable, or changing lenders, before the fixed term ends.

Capped Loans

As the name suggests, capped loans have an interest rate ceiling for a fixed period of time. The rate cannot exceed this ceiling during this period. But if interest rates go down, the rate you pay can be beneath this ceiling. Rates are normally capped for one year or less and then default to the standard variable rate.

Advantages

  • If interest rates increase, your interest rate will not rise beyond its cap.
  • If rates decrease, your interest rate will fall along with market rates.

Disadvantages

  • With some institutions the variable rate that capped loans default to may be higher than standard variable rates.

Introductory Loans

Interest rate is usually low to attract new borrowers. Introductory loans normally have a period of two years or less with most being for 12 months. After the introductory period most introductory loans revert to the standard variable rate.

Advantages

  • Usually the lowest interest rates available on the market.
  • A reduced interest rate at the begining helps the borrower adjust to mortgage payments.
  • If payments are made at the variable rate the principal can be reduced quickly.
  • Some banks provide an offset account on these loans.

Disadvantages

  • Payments may increase when the inital period ends.
  • If interest rates fall you could be locked into higher rates.

All In One Loans

Certain lenders offer all in one loans which allow you to deposit all of your income into your loan account, thereby reducing the balance of your loan. These loans offer the added flexibility of allowing you to redraw any excess funds through a variety of means.

Advantages

  • It operates like a transaction account. It will generally have a cheque facility, a cash card and even a credit card.
  • You can make additional repayments to your loan without incurring any penalties.

Disadvantages

  • You will often pay a higher rate than on standard variable loans. Expect to pay a premium for the flexibility of all in one loans.

Combination Loans

A loan that allows borrowers to take up part of their loan as a variable rate loan and part as a fixed rate loan.

Advantages

  • Offers borrowers the chance to hedge their bets in times of fluctuating interest rates. n A blend of repayment flexibility and interest rate security.

Disadvantages

  • The variable portion of your loan is still vulnerable to increases if rates go up. If interest rates drop below your fixed rate, you still have to make repayments at the high rate.

Equity Line of Credit

This is a line of credit which is secured by a mortgage over a residential property. Most home equity loans work more like an overdraft than a second mortgage.

Advantages

  • You can use the money as you need it and pay it back when you can.
  • Interest rates tend to be lower than for credit cards or personal loans.
  • Credit limits are usually higher than for credit cards or personal loans.

Disadvantages

  • Unless care is shown it is possible to reduce the equity you have built up in your home.



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