Loans come in about as many shapes and sizes as houses do. So how can you pick the right one for you?
We recommend you always get independent financial advice to help with big money decisions in your life.
To start your home loan education, here’s a crash course in loan features you’ll need to know to borrow with confidence when you find your dream home.
- Interest rate. Let’s start with the basics. When you borrow money from a bank they charge you for the privilege. An interest rate is essentially the price you pay for borrowing money. It is calculated as a percentage of the total loan amount.
- Variable interest rate. The interest rate on a variable rate loan changes over time, depending on many things that affect the price at which banks can source the funds they lend you. If you want to make extra repayments and have the option to redraw those payments, you will likely find a variable rate loan gives you more flexibility.
- Fixed interest rate. A fixed rate loan offers a set interest rate over a specified period, typically 1, 3 or 5 years. At the end of the fixed loan you will usually switch to a variable rate loan. A fixed rate may be useful if budgeting for a fixed amount is important to you. Rate rises won’t affect your loan repayment, but neither will you benefit if rates drop. Often you can’t make extra repayments, and a break fee may apply if you change or pay off your loan sooner than the fixed term.
- Honeymoon rate. Some lenders offer a cheap introductory rate during the first year or so of your loan. Make sure you understand what full interest rate will apply once the honeymoon period is over.
- Offset facility. An offset account is an everyday transaction account that gives you easy access to your money. The balance you hold in this account effectively offsets (reduces) your loan balance so you pay less interest.
- Redraw facility. Some loans will let you make extra repayments to reduce your loan balance, but you can redraw these extra payments if you need them. It’s important to check if there are restrictions on how much or how little you can redraw and whether fees apply.
- Home loan fees can vary and can include up front establishment fees, as well as ongoing annual fees and transaction fees. Make sure you compare the cost of fees, not just interest rates, when you are choosing a loan.