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Home Loan Interest Rate Types

Home loans are generally classified into two types: fixed home loans and the variable home loans.

Fixed home loans have a set repayment amount that will not be affected by interest rate changes. If you want to lessen the risks that are brought by volatile interest rate movement, this home loan is for you. Fixed home loans offer repayment stability though there might be changes in the official cash rate.

This home loan type is ideal for handling your finances well as you can allot a fixed amount for your repayment and use the rest of your money for other expenses.

Meanwhile, the variable home loan allows a borrower to pay in varied amounts. More loaners avail of this option since it is heavily dependent on the market interest rate so repayments can either be high or low. Likewise, its interest rates go up when the Reserve Bank of Australia cash rate goes up as well. And because they have more features as compared to a fixed home loan, they usually incur higher interest rates.

You can also have a split home loan which has the features of both the fixed and variable characteristics. For this, you sign up for a split home loan. With this deal, you can pay part of your loan via a fixed rate and another through variable conditions.

This type of home loan makes repayment faster too. Interest only home loans let you pay only the interest rate for about one to five years but you must start paying the principal amount afterwards. This type of home loans can trim down the expenses for purchasing a residential property. However, lenders will determine your capacity to pay the loan through your repayments.

Interest-only home loans initially cut the expenses for purchasing a residential property which allows you to use the money for other needs. On the downside, lenders will weigh your capacity to shoulder the loan through your repayments and this can limit your chances of borrowing more funds. Also, honeymoon home loans would suit start-up families for it carries a low initial interest rate for a year or two and an offset account is set for you. But after the honeymoon period, the rate reverts to standard interest rates.

There is also a no deposit home loan which allows you to borrow the full amount of the house’s purchase price. Also, this option also makes you eligible for the First Home Owners Grant. However, this deal entails additional fees for stamp duty and conveyancing. And last but not the least, an equity home loan is part of your options too. Also called the Line of Credit home loan, this deal has a continuing pre-set limit that does not reduce over time. The funds that will be generated can be used for shares and renovations of a personal or an investment property. However, its interest rate is slightly higher than the standard rate.

Also, the fund redraw capability can turn out to be expensive if it is not used wisely. Utmost discipline is needed to regularly pay principal repayments.