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The types of mortgages and home loans in Australia

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The types of mortgages and home loans in Australia

With house prices at record highs, these days, getting a home loan is essential for most Australians looking to buy a new home.
There are hundreds of home loans out there. And choosing the best loan for your circumstances can be daunting if you don’t have all the right information. A good starting point is working out whether a variable, fixed or split rate home loan is suitable for you.
Let’s take a look at the different types of home loans in more detail.

Variable rate home loans

Variable interest rate loans are a popular choice for Australian property investors. With variable rate home loans, your mortgage repayments will rise or fall in response to changes to the cash rate set by the Reserve Bank of Australia (RBA).

Pros:
Variable rate loans offer more flexibility than other loan types. You can take advantage of a range of features that can help reduce your interest repayments over the life of your loan.
For example, many lenders will let you make as many additional repayments as you like at no cost. This will help you pay your mortgage off faster should extra funds become available. Some lenders also allow unlimited redraws on these extra repayments, which can come in handy down the track.
A mortgage or home loan offset account is another great feature that comes with most variable rate loans. Here, your savings account can be linked to your mortgage. Any funds held in your savings account are offset against your loan balance, and you’re only charged interest on the difference, which reduces your interest repayments.
What’s more, if you find a more suitable or better home loan at any time, you’re unlikely to have to pay to refinance your loan with another lender.

Cons:
You need to be prepared for your repayments to increase if interest rates rise.
Interest rates may sometimes be higher than with fixed rate loans.

Fixed rate home loans

With fixed rate home loans, the interest rate is fixed for an agreed period, which means your mortgage repayments are consistent. Interest rates can be fixed for anywhere from one year to 10 years, although three and five-year fixed rate loans are the most popular.

Pros:
Fixed rate home loans are a great option if you’re on a strict budget and are looking for certainty on your loan repayments. They’re also a popular choice for borrowers securing a mortgage when interest rates look set to rise.
Some fixed rate loans allow you to make a limited number of extra repayments each year at no cost. Some also offer a redraw option like with variable rate loans.

Cons:
If interest rates fall, you may be locked into a fixed rate that’s higher than a variable rate loan. And breaking a fixed rate loan can be very costly.
Fixed rate home loans offer less flexibility than variable rate loans. For example, often banks will charge you for making extra payments towards the loan during the fixed period.

Split rate home loans

The final option is a split rate home loan, which combines both a variable and a fixed component to your mortgage.

Pros:
The fixed part of your mortgage will be protected against any interest rate rises. And repayments on the variable portion of your loan will decrease if interest rates drop.
There are usually no restrictions on how you split the loan. Plus, most banks will allow you to split your loan without having to pay for two separate loan applications.
Split rate loans also offer variable home loan features such as the ability to make extra payments and redraw on your loan, but with greater certainty around monthly payments.

Finding the best home loan for you

Before deciding whether a variable, fixed or split rate home loan is right for you, it’s important to consider your financial goals and situation. A mortgage broker can help you find the best loan for your needs, and save time and money on your mortgage.
If you’re looking for a mortgage broker in Melbourne, look no further than Mel Finance as your mortgage broker Melbourne. We offer a friendly, flexible and efficient mortgage broking service, which we’ll personalise to meet your needs. Contact us today to discuss the best home loan for you.

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