Variable Rate
The most common interest rate type in Australia is the variable rate. Under this form of interest rate, the initial and ongoing rate is set by the lender. The lender has the right to change the interest rate during the loan's life.
Because of intense competition between lenders in the variable rate market, most lenders will only change variable rates for existing loans in response to movements in the official cash rates, as announced by the Reserve Bank of Australia ("RBA"). Therefore, you can generally be confident that your rate will change only in response to movements in the RBA's official cash rate.
Advantage: Variable rate loans generally have no restrictions or penalties for making additional repayments on your loan; therefore you may be able to pay off your loan sooner. Additionally variable rates will obviously advantage you if interest rates fall, as your monthly minimum repayment will fall.
Disadvantage: Variable rate loans will disadvantage you if rates rise, because your repayments will increase.
The most common interest rate type in Australia is the variable rate. Under this form of interest rate, the initial and ongoing rate is set by the lender. The lender has the right to change the interest rate during the loan's life.
Because of intense competition between lenders in the variable rate market, most lenders will only change variable rates for existing loans in response to movements in the official cash rates, as announced by the Reserve Bank of Australia ("RBA"). Therefore, you can generally be confident that your rate will change only in response to movements in the RBA's official cash rate.
Advantage: Variable rate loans generally have no restrictions or penalties for making additional repayments on your loan; therefore you may be able to pay off your loan sooner. Additionally variable rates will obviously advantage you if interest rates fall, as your monthly minimum repayment will fall.
Disadvantage: Variable rate loans will disadvantage you if rates rise, because your repayments will increase.
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Fixed Rate
Most lenders offer fixed rate loans, generally for 1 to 5 year terms. At the end of the term, the interest rate usually converts to variable. On a fixed rate loan, your interest rate remains the same during the entire fixed rate term, even if variable market rates change. The fixed rates offered by lenders can be either higher or lower than the variable rate at any given time; therefore you need to make a comparison when considering this option.
Advantage: With fixed rate loans you are not impacted if variable rates increase, because your fixed rate will not change. This means that fixed rate interest can work out cheaper compared to variable rate interest.
Disadvantage: However, if variable rates decrease, you will not receive any benefit, as your fixed rate will remain the same. If market variable rates fall over time, it is possible that your fixed rate could be higher than the current variable rate, so a fixed rate loan could cost you more. Furthermore, you generally cannot make additional repayments on the loan without incurring penalties.
Most lenders offer fixed rate loans, generally for 1 to 5 year terms. At the end of the term, the interest rate usually converts to variable. On a fixed rate loan, your interest rate remains the same during the entire fixed rate term, even if variable market rates change. The fixed rates offered by lenders can be either higher or lower than the variable rate at any given time; therefore you need to make a comparison when considering this option.
Advantage: With fixed rate loans you are not impacted if variable rates increase, because your fixed rate will not change. This means that fixed rate interest can work out cheaper compared to variable rate interest.
Disadvantage: However, if variable rates decrease, you will not receive any benefit, as your fixed rate will remain the same. If market variable rates fall over time, it is possible that your fixed rate could be higher than the current variable rate, so a fixed rate loan could cost you more. Furthermore, you generally cannot make additional repayments on the loan without incurring penalties.
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Introductory / low start / honeymoon rates
Advantage: Many lenders offer reduced interest rates for a limited time at the beginning of your loan, generally for periods between the first 6 to 24 months. This can provide a useful benefit for you, by freeing up some cash to help get your new home established.
Disadvantage: However, you should be aware that there is generally a catch with introductory rates. Usually after the end of the introductory period, when the rate returns to a variable rate, that rate will be higher than the normal variable rate offered by the lender. Therefore, you need to weigh up the pros and cons, to work out whether the benefit of a reduced rate at the beginning, is worth the additional cost of a higher rate later.
Advantage: Many lenders offer reduced interest rates for a limited time at the beginning of your loan, generally for periods between the first 6 to 24 months. This can provide a useful benefit for you, by freeing up some cash to help get your new home established.
Disadvantage: However, you should be aware that there is generally a catch with introductory rates. Usually after the end of the introductory period, when the rate returns to a variable rate, that rate will be higher than the normal variable rate offered by the lender. Therefore, you need to weigh up the pros and cons, to work out whether the benefit of a reduced rate at the beginning, is worth the additional cost of a higher rate later.
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Split Loans
Most lenders will allow you to take out a split loan, which is a combination where part of the loan balance is treated as variable rate and part is fixed rate. This can offer the advantage of having an "each way bet" if you're not sure about which option is suitable.
Most lenders will allow you to take out a split loan, which is a combination where part of the loan balance is treated as variable rate and part is fixed rate. This can offer the advantage of having an "each way bet" if you're not sure about which option is suitable.
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Principal & interest ("P&I") / Interest Only
("IO")
The most common loan type is principal and interest where you repayments are applied to pay interest and also to pay off the loan principal over the loan's life.
It is also possible to obtain an interest only loan, which have lower repayment requirements because you only have to pay the interest. With an Interest Only loan, the loan balance does not get "paid off".
Most lenders will apply special conditions to IO loans, such as a restriction on the term of up to 5 years and restricting availability only to finance investment properties.
The most common loan type is principal and interest where you repayments are applied to pay interest and also to pay off the loan principal over the loan's life.
It is also possible to obtain an interest only loan, which have lower repayment requirements because you only have to pay the interest. With an Interest Only loan, the loan balance does not get "paid off".
Most lenders will apply special conditions to IO loans, such as a restriction on the term of up to 5 years and restricting availability only to finance investment properties.
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