There are a lot of different kinds of loan products available
and it can be confusing trying to sort through them. It’s
important to be informed and understand how a particular
loan will work for you, so here are some simple descriptions
of the various types of loans you are likely to encounter.
Standard Variable Rate Loans
This loan is called a standard variable rate loan because it is
based on the official Reserve Bank cash rate* and varies over
time. Your payments will increase or decrease depending
on the movement of the Reserve Bank rate. This is one of
the most popular home loans as it usually offers a variety of
features such as the option to make additional repayments
without penalty, to split your loan, or to redraw funds from
*The Reserve Bank of Australia set the official cash interest
rate monthly. This determines how much interest financial
institutions pay to use the Reserve Bank’s money. The financial
institutions pass interest rate increases or decreases on to their
customers by raising or lowering their standard variable rate.
Basic Variable Rate Loans
This kind of loan is also sometimes called a “no frills” loan. It
usually offers a lower interest rate than the standard variable
rate, but the trade off is that it also offers fewer features and
can be less flexible. You may have to pay additional fees for
services like early repayment, or withdrawals, or you may not
be able to do them at all.
Introductory/Honeymoon Rate Loans
Honeymoon Rate loans offer a reduced interest rate for a
set period – often a year, and then revert back usually to the
standard variable rate in effect at the time. They can be either
fixed or variable during the honeymoon period. Sometimes
these loans may have an early repayment penalty attached to
them to deter you from refinancing elsewhere at the end of
the honeymoon period.
Fixed Rate Loans
Fixed rate loans are for a set period of time ranging from
as short as 6 months to as long as 10 years. Like their name
suggests, the interest rate is fixed for the period of the
loan. This offers the certainty of knowing exactly what your
payments will be throughout the duration of the loan.
Although it also means that if interest rates fall during the
loan period, your repayments may be higher than if you had
taken out a variable rate loan. Many borrowers split their
mortgage between a fixed and variable rate loan to receive
the benefits of both products. Fixed rate loans generally limit
the amount of extra repayments you can make each year,
and often charge an exit fee if you pay the loan out before
completion of the fixed term.
Also known as salary accounts, all-in-one loans combine the
features of a transactional account and your home loan. Your
salary or other income is paid directly into the account and
you access your money in the usual way through EFTPOS,
ATM, a linked credit card or cheque book as you need. The
goal is to keep your funds sitting in the account as long as
possible. Home loan interest rates are calculated daily and
any additional funds you have in the account will reduce your
balance and cut your interest payments. Interest rates for
this type of loan may be slightly higher and the entry fee and
ongoing fees also tend to be higher than for some other loan
products. This type of loan only works for disciplined savers
who will ensure that they do not withdraw more money than
is going in.
In order to attract the borrowers they consider most desirable,
many lenders offer professional package loans which have
discounted interest rates. In the past, professional packages
were for individuals in specific professions like medicine,
engineering or law. Today professional package loans are
targeted towards applicants with a high income or large loan.
They are referred to as packages because they usually offer a
range of benefits like an offset account, free credit card and, of
course, a reduced interest rate. Interest rates can be 0.5% lower
than the lender’s standard variable rate or 0.25% lower than
their fixed rate, but may be even greater for a large loan.
Marc has been a professional lender for 28 years. After beginning his career in 1990 with a UK Building Society, he moved to Australia where he held several different retail banking roles. In 1999 it became clear to him that a mortgage broker would eventually become an obvious choice for someone looking for a home loan so he took the plunge and became an independent broker. He hasn’t looked back since!