Which type of home loan?
Fixed rate loans
A fixed rate gives you certainty for a period of time so it's a good choice when you have to budget. Look for fixed loans that allow you to make extra repayments without penalties. Timing is important when deciding whether to lock in a fixed rate.
If interest rates are expected to rise, a fixed rate is likely to be above the variable rate when you take it out but could stay below it if rates go up.
If interest rates are predicted to fall, a fixed rate could be lower than the current variable rate when you take it out, but end up higher if rates fall.
Even with a fixed rate, the interest rate isn’t everything. Make sure you understand “break” costs for paying off the loan early, and any other conditions before you sign.
Standard variable rate loans
Traditionally, these have more features than basic loans. They can include:
Split loan: Part of your loan is at a variable and part at a fixed rate (see the calculator below).
Offset account: You can store your savings in a separate account linked to your loan and receive a reduction in the interest due on the loan. For example, if you have $5000 in the account and owe $250,000, you’ll only be charged interest on $245,000.
Redraw: You can store your savings directly in the loan account to help pay it off faster, but withdraw them if needed.
Package with a free bank account and credit card. However, high ongoing fees apply to some packages.
Discount on the standard variable interest rate up to 0.7% – the more you borrow, the higher the discount.
Basic variable rate loans
Basic loans usually have an interest rate 0.5% to 0.7% below the standard variable rate. Again, the interest rate isn’t everything. Some basic loans are restricted and have significant disadvantages – they may not even allow extra repayments.
The good news is that cheap basic loans that have most features of a standard variable rate loan are now available. However, basic loans usually don’t offer an offset account and may charge higher fees for redraws (up to $75 per redraw) and higher annual or monthly service fees.