Overview of Australian Residential Mortgage Choices
A detailed overview
of all the major
Australian loan types.
There are basically four types of mortgage choices popular in Australia. These are fixed interest rate, standard variable
rate, basic variable rate, and split rate home loans.
Fixed Interest Rate
A fixed interest rate mortgage has a fixed interest rate for a set term which is usually one to five years. When the term expires the borrower can generally roll over the loan into new fixed term loan at the current interest rate or convert to a variable rate loan. These mortgages are very popular especially when interest rates are rising because borrowers can lock into a rate. This provides peace of mind and stability. The problem is, this can also be a bad thing if interest rates fall. For example, if the fixed rate is 8% and interest rates fall to 6% the borrower is unable to take advantage of the lower interest rates and associated lower repayments. Fixed interest rate loans are typically more expensive than variable rate. The trade-off is for the security and stability provided by the fixed rate.
Standard Variable Rate
The variable rate is probably the most common form of mortgage in Australia and is considered a principal and interest type loan. The biggest advantage of variable rate loans is that there is no penalty in paying off the loan more quickly. This can be done by making extra payments or more frequent payments. They often also have what is called a redraw facility which means you have easy access to those extra funds if needed. With standard variable rate home loans if you want to sell your existing house to purchase another one it may be possible to take your existing loan along with you, which will save on loan fees.
Basic Variable Rate
Basic variable rate home loans usually have the cheapest interest on the market. This doesn't necessarily mean that they are the cheapest loans as there may be extra charges like monthly account management fees and they may not have all the features of other loans. These loans sometimes have a redraw facility.
Split rate home loans tend to be popular in uncertain times. Split rate home loans are basically a combination of a variable interest loan and a fixed interest loan. The borrower takes out part of the loan at a fixed interest rate meaning that the rate will remain consistent. The borrower then takes out the other portion of the loan with a variable interest rate. You can see that there are a variety of Australian mortgage choices.
The loan that is right for you will depend upon your individual circumstance and goals. It is recommended that you talk with your mortgage professional about what type of loan might be right for you.
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