If you’re in the process of buying your first home or even purchasing an investment property, chances are you’ve looked at a few options for your home loan. With heaps of different finance products on the market, it can often get confusing what type of loan is right for you. With everyone’s situation and needs differing, it’s important to understand what the loan types actually mean. Here, we’ve highlighted a few of the most common loan types.
A standard variable loan is one of the most common loan types. Repayments include both the amount borrowed (principal) plus interest payable over the term of the loan. The interest rate charged on the loan balance varies throughout the loan term, meaning the repayments can differ month to month. When the interest rate is dropped, you can enjoy lower repayments. However, if interest increases, your repayments are likely to increase too.
Fixed rate loan
Some loans offer the feature of a fixed interest rate for a period of time, usually between one to five years. The benefit of a fixed loan is the certainty of your repayments, but the downside is that you’re locked into a rate. If interest rates go down, your repayments do not go down, so you don’t enjoy lower repayments.
A split home loan may give you the best of both worlds. A portion of your loan is fixed at a set rate, giving you the certainty of your repayments for that portion. The other portion is variable, meaning repayments can go up or down depending on interest rate changes.
Interest only loan
As the name suggests, your repayments with an interest only loan only includes the interest portion, not the principal. This loan type may be a good option for property investors who are looking to maximise their tax deductions (speak to our accountants for further advice), since they cannot claim principal payments. The downside to interest only loans is that they generally come with higher interest rates and you are never paying off your principal, so your loan amount is not decreasing, meaning you still owe the bank the original amount borrowed.
An offset account is linked to your loan account, and the balance is essentially offset against the principal amount, reducing the interest payable. For example, if your home loan is $300,000 and you have $30,000 in your offset account, you would only pay interest on $270,000. Your loan repayments remain the same, but a bigger portion goes towards the principal amount, meaning you’ll pay your loan off quicker.
A redraw account allows you to make extra repayments on your home loan and then access those additional funds if needed.
Speaking with a finance broker can give you clarity on the different loan types available. A broker will talk through your options and work with you to determine which loan type may be best suited to your situation. If you’re a first home buyer or a seasoned investor, the guys at Carbon Finance & Lending are more than happy to assist. Contact us to discuss your loan options.