How to choose a loan that saves you more

How to choose a loan that saves you more

If you’re feeling overwhelmed about choosing a loan, well, you’re not alone. At any given moment, there are hundreds of loan products circulating the finance-sphere.

Some have good rates and high ongoing fees, some work for employees but not contractors, others are so niche you may not even realise they exist.

Yep, overwhelming indeed.

Luckily, with a good broker by your side, you can cut through the confusion and pinpoint a loan that matches your goals and budget.

Because understanding finance shouldn’t have to be hard, we’ve explained the main types of home loan, and the pros and cons of each.

The main types of home loan

  1. Variable loan.
  2. Fixed rate loan.
  3. Split loan.

What’s a variable loan?

Variable loans attract an interest rate that goes up and down during the life of the loan. The interest rate depends on the official cash rate, which is set by the Reserve Bank of Australia.

Variable loans tend to be the most popular kind of loan amongst borrowers in Australia.

The pros of variable loans

  • If interest rates fall, your minimum repayments fall too.
  • You may make additional repayments whenever you like.
  • These repayments can be any amount you desire.
  • There are no fees, if you decide to terminate the loan, refinance or sell the property.
  • They typically have a redraw facility, which means you can redraw back advance repayments, if you need to.

The cons of variable loans

  • If interest rates rise, your minimum repayments will rise too.
  • These increases may impact your budget and lifestyle.

Types of variable rates

There are 3 kinds of variable rates:

1. Standard variable rates 

  • This is like the benchmark for comparing the other variable products. 
  • It has no real features, and typically has the highest rate. (Hence the name ‘standard’.)
  • Borrowers don’t tend to opt for it unless it’s part of a package. 

2. Basic variable rate 

  • It’s ‘basic’ because it doesn’t have a whole lot of extras, like linked offset accounts or credit cards. 
  • Tends to offer a low ongoing rate, with minimal fees, which allows borrowers to make unlimited additional payments. 
  • Popular with homebuyers.

3. Package loan 

  • The lender provides a discount off the standard variable rate. 
  • Packaged with other kinds of products, such as offset accounts, credit cards and insurance products. 
  • Tends to have no upfront costs, except for an annual fee, which covers the products within the package and future borrowing. 
  • Popular with borrowers who have one or more home loans, as greater savings are offered to those who borrow more.

What about fixed rate loans?

A fixed rate loan attracts an interest rate, which remains the same for the entire term of the loan. This terms can be anywhere from 1 to 5 years in length.

This means that no matter how high or low the cash rate goes, your repayment amounts will remain the same.

The pros of fixed rate loans

  • Repayments are not impacted by the rise or fall of interest rates.
  • This makes it easier to manage your budget, as no matter what, you know what your repayment amount is going to be.
  • Great for borrowers on a tight budget, who cannot afford to cover increases in rates.

The cons of fixed rate loans

  • If interest rates do fall, you won’t get to take advantage of the lower rates.
  • If variable rates decrease for the full term of your loan you’ll end up paying more.
  • Many lenders restrict additional repayments on fixed term loans.
  • If you break the fixed term contract, you could be penalised heavily.

Thinking fixed rate? Read this first

Always consider your overall objective before entering a fixed loan agreement. For example, if you are planning to make extra repayments in bulk to reduce the balance of your loan, a variable rate loan would probably suit you better.

If you’re planning to sell in 3 years, don’t sign up for a 5-year fixed rate loan, because getting out of it could attract big penalties. A good broker will make sure you choose the right kind of loan for your needs, so you don’t run into these problems later.

And finally, split rate loans

This kind of loan is, you guessed it, split between fixed and variable. This means you get the security of a fixed rate loan, as well as the flexibility of a variable rate loan.

How does this work? 

A borrower usually fixes the bulk of their loan, then makes minimal repayments on this portion. They then pay a variable rate on any extra repayments, which saves them on interest, without being penalised.

What kind of loan is right for me?

The style of loan that suits you will depend on your particular circumstances, goals and budget. A good mortgage broker will assess these factors, and then research and tailor a loan that matches your goals, and saves you more.

Contact us to get started.

Financial Advice Disclaimer: This information is general in nature. Mortgage brokers do not provide financial advice. Clients seeking financial advice will be referred to a qualified financial planner.