Home loans and mortgages are not purely about rates and terms. The right home loan needs to be tailored to your specific situation to provide the right level of functionality and flexibility in the short, medium and long term. It all needs to fit in with your short term affordability and long term financial goals.
The most popular loans for your principal residence are:
Basic Variable Home Loan
Basic variable rate loans are sometimes referred to as the 'no frills' alternative to the standard variable rate loans. The interest rate is lower than a standard variable loan, making them attractive to the budget conscious borrower. This lower variable rate however comes with fewer features. These loans normally have no ongoing fees.
Basic Variable Home Loan with Offset Savings Account
This loan product uses the same basic home loan product mentioned above as well as an everyday savings account. The everyday savings account is used for salary crediting, other deposits and regular withdrawals via an ATM. This savings account does not earn interest, but instead is used to save interest on your home loan.
It does this by applying the daily balance of your offset savings account against the daily balance of your home loan account. This results in a lower theoretical loan balance. It is on this lower theoretical loan balance that interest is calculated and charged. This results in lower interest charges on your home loan and can therefore facilitate earlier repayment of your mortgage.
This type of loan product can come with a monthly or annual fee. It is therefore important to weigh up the advantage of the interest saving against the cost of the loan product.
Line of Credit Home Loan
A line of credit home loan provides you with access to the equity in your home up to a pre-approved limit. A line of credit home loan allows for salary crediting directly to the loan (which can keep interest costs down) and also generally allows for daily withdrawals via an ATM card. As such with this type of product there is no need for a separate savings account.
A credit card can also be provided with the loan which can be automatically cleared every month from the home loan via redraw should the facility limit allow it.
The interest rate on a line of credit loan is usually variable and is usually up to half a percent higher than the rate applicable for the basic variable home loan product. There is also generally an annual package fee with this type of loan product. The increased flexibility and functionality is reason for the higher costs.
Fixed Rate Home Loan
Fixed rate loans lock your interest rate at a consistent rate for the contracted term (generally for 1 to 5 years). At the end of the fixed term, the interest rate usually converts to a standard variable rate.
Fixed rates offer certainty in calculating what your repayments will be whilst the loan is fixed. They can be a great tool for those on a tight budget or during times of relatively low interest rates. Fixed rates usually carry restrictions with regards to making extra repayments so this can be shortcoming for some borrowers who want to make extra repayments along the way.