When you begin looking for a home loan you’ll find there are a wide range of options available to you. But before choosing which home loan is going to be best for you, you’ll need to assess your current situation and future options. So what the most comment types of home loans and what sort of benefits each can offer you?
The Home Loan Rate
Debate
When
you begin looking for a home loan you’ll find there are a wide range of options
available to you. But before choosing
which home loan is going to be best for you, you’ll need to assess your current
situation and future options. So what the most comment types of home loans and
what sort of benefits each can offer you?
The Fixed Rate Home
Loan
Fixed
Rate home loans are loans where the interest rate charged on the loan remains
fixed for the entire term of the loan, no matter what market interest rates do.
The
key to this type of loan is all in the timing. When you choose to fix your rate is often
critical, determining how your rate will compare with standard variable rates
during the loan period.
With fixed rates, lenders try to predict where rates will sit for the term of your
loan. The result is fixed rates can vary
substantially between loan providers.
Who
does this loan appeal to:
Perfect for people who want certainty on their loan repayments.
Word of warning: Beware of steep
cancellation fees. These fees are often associated with this type of loan, put
in place to deter borrowers from switching loans if the fixed rates drop significantly.
The Variable Rate Home Loan
Variable Rate home loans tend to provide borrowers with more options and
flexibility, with rates which can rise and fall depending on the official cash
rate and various costs experienced by mortgage providers.
When shopping around for a standard variable rate you should note the
comparison rate on the loan. The comparison rate shows the annual percentage
rate of the loan when compulsory fees are included and gives a true cost of the
loan. By law, this must be advertised alongside the standard variable rate.
Who does this loan appeal
to:
For those who want more flexibility with their loans.
Word of warning: Comparison rates
won’t include costs which may be incurred during the period of the loan such as
redraw, early termination fees and dishonour fees. Make sure you’re aware of
these additional costs when you make your final choice.
The Capped Rate Home Loan
Capped Rate home loans are usually associated with a variable loan
structure but with a ‘stopper’ on how high rates can go during the course of
the loan. With this type of loan, rates can’t go higher than the capped rate
for a set period but may still fluctuate below the cap.The term for which a
rate can be capped varies between loan providers.
Who does this loan appeal to:
Capped rates provide security and peace of mind for rising rate environments,
whilst also offering the flexibility of a standard variable rate loan.
Word of warning: If you are considering
choosing a capped rate product it is recommended you compare fee structures and
the current competitive nature of the rates with other products on the market.
The Split Rate Home Loan
Split Rate home loans allow you to split your loan amount between a fixed
interest rate and a variable interest rate. Splitting your home loan into fixed
and variable rate portions can provide insurance against future changes in
interest rates which can't be predicted. With these types of loans you
generally get the advantage of early repayments, redraw and mortgage offset
without exposing your entire loan to fluctuations in interest rates.
The Honeymoon/Introductory Rate Home
Loan
Many lenders now offer home loans with a low introductory interest rate.
These are often known as ‘Honeymoon’ Rate home loans.
Honeymoon Rate home loans offer a substantially lower interest rate for a set
introductory period. After this initial term, the interest rate generally
reverts to the standard variable rate offered by the lender. The length of the
introductory rate, the introductory interest rate itself and the interest rate
you pay once the initial period ends, depends on your chosen lender.
Who does this loan appeal to:
Honeymoon Rate loans often target bargain hunters.
Word of warning: It’s important the
check what the revert rate will be as this rate will determine how much you’ll
pay in interest over the life of the loan. If the revert rate is not
competitive with other variable rates, your whole package can end up more
expensive over time.
The Tracking Rate Home Loan
Only recently emerging on the market is the Tracking Rate home loan. Not
surprisingly, these types of loans involve ‘tracking’ the average standard
variable rate of the big four banks.
These types of loans are often promoted as being lower than the big four banks
offerings by around 0.5% to 1% for certain period of time, typically up to
three years.
Who does this loan appeal
to:
Often pitched to first home buyers and those refinancing.
Word of warning: Be aware of the
two main differentiators between the tracking rates of various loan providers;
fees associated with the loan and the revert rate when your loan comes off the
tracking rate period.
Ultimately, which ever home loan you choose will depend on your finances, the
features you need in a loan and how long you plan to own the property. Your
financial advisor will help you in making the decision to find the home loan
that suits you best, but make sure you’re knowledgeable about your home loan -
after all it is your money!
Source:
http://www.echoice.com.au/mortgage/home_loans?pn=/info/home_loan_types/general_home_loans.html
February 2011
