Variable Rate

A variable rate loan suits those who wish to keep their interest costs to the minimum and are happy to take a gamble on the direction that interest rates will take in the future. A variable rate loan will move up and down with market fluctuations, i.e. when the banks decide to increase or decrease the rate. This can be in line with the Reserve Bank's (RBA) rate movements or be totally independent and driven by the bank.

For example, when the RBA announce a decrease in interest rates, each bank and lending institution will make a decision on whether to also apply the reduction, and if so to what degree. When interest rates rise, variable rate loan borrowers will also see their rate increase. A variable rate can come in the form of a basic variable, standard variable or combination home loan as well as various other "product names" that lenders may use.

Low Interest, flexible to make additional/more frequent payments

No certainty around interest rate

Fixed Rate

A fixed rate loan is ideal for people who want security in knowing their exact repayment. You can generally fix your interest rate anywhere between 1 and 7 years with some lenders offering 10 and 15 year terms. Generally speaking, the higher the fixed rate period - the higher the rate, although lenders will sometimes put out specials on 2, 3 and 5 year fixed rate terms. Most fixed rates will then default, or roll over to the standard variable rate at the end of the fixed term. The main advantage with fixed rates is that if rates rise, you could save a considerable amount. However, consider the major disadvantage of fixed rates, the fact that if rates fall - you could end up stuck with a much higher rate or break costs - to break your fixed term, payout or refinance earlier. Some lenders will also limit the amount of extra repayments you are permitted to make whilst in a fixed rate loan and the costs for paying extra can be substantial. It is important to consider the limitations of any product, including a fixed rate and know the difference between each lender’s fixed rates as some will be more flexible than others.

Certainty over an agreed term, ability to lock in a preferable rate

Lack of flexibility around extra payments, stuck with high rate if general rates decrease

Introductory Rate Home Loan

An introductory rate home loan, sometimes also called a Honeymoon Rate is generally aimed at first home buyers offering a low rate for an initial period of anywhere from 6 months to 3 years. Once the "honeymoon" or introductory period is over, the low rate will generally revert to the lender's standard variable rate. The advantage with these rates is that you can pay the lowest repayment possible for that initial period, and this can be a helpful for first home buyers who generally also need to purchase furniture, blinds and sometimes, if buying land and building, landscaping and driveways. The disadvantage is that you can get accustomed to making very low repayments and when your rate reverts to the standard variable it can be a shock to your personal budget. Some lenders will also limit the amount of extra repayments you can make while in a honeymoon rate and charge penalties of breaking the agreement before it is due to end. It is important to check the revert rate, comparison rate (and what is included in the comparison rate), the features of the honeymoon rate and if there are penalties for exiting early.

Ease into loan repayments, have spare funds to set up home

Lack of pattern of higher interest payments, limited flexibility to make additional payments

Professional Packages

Most major lenders now offer Professional Packages for loans above $250,000. This can be one loan of more than $250,000 or a total aggregate lend of $250,000. These packages were originally set up for certain professions or income brackets but are now available to essentially anyone, provided they pay the package fee. The package fee ranges between $300 and $400 and aims at delivering a suite of banking products under the one fee and umbrella including products like:

• Loan - with a rate reduction on either the standard variable loan or fixed loans of between 0.25% and 0.70%
• Banking accounts – without fees or reduced-fee options
• Credit card - with no annual fee or reduced-fee options
• Free valuations on your property
• Other ancillary products like home, car, contents or life insurances, discounts on personal loans etc.

A professional package may be suitable for you if you fit into any of the following criteria:

• you are borrowing more than $250,000,
• you wish to use a credit card in conjunction with your home loan,
• you are likely to make changes to your borrowings,
• you wish to have part of your loan variable and part fixed,
• you want to have ultimate flexibility.

It is important to crunch the numbers are work out if you are going to save money by having a professional package or if you are better off with another product.

Consolidated debt for easy management, reduced interest rate

Higher package fees

Line of Credit/Equity Home Loan

A Line of Credit or Equity Loan is somewhat similar to a large credit card. A lender will lend up to 80% of the value of security. Generally, a line of credit does not have a set term nor fixed repayments. Therefore, this product relies on the borrower managing his/her own debt by depositing more than what it spent plus loan fees and debit interest in order to reduce the balance. The lender can demand a payment if you are not managing the account properly. A line of credit can provide the ultimate flexibility, which is why there is generally a higher cost, either in the way of interest rate or fees to utilise such an account.

Full flexibility in debt management

High fees, relies on self-management

Guarantor Loans

A Family Guarantee, Family Pledge or Guarantor loan allows family members (generally a parent, grandparent or parent in-law) to use the equity in their home as additional security for a portion of the loan amount. This means, you may be able to avoid lender's mortgage insurance (LMI) and possibly reduce your deposit requirements.

The lender will generally take a limited guarantee of around 20% and mortgage this over the guarantor's property and the remaining 80% will be mortgaged or secured against the borrower’s property. It is important to note that many lenders will not use a guarantor's primary place of residence in a guarantee unless the guarantor has other substantial assets.

Lower LVR to avoid LMI, lower deposit required

Relationship breakdown if loan defaults, additional fees

Commercial Loan

A commercial or business loan is very similar to a personal loan but it is structured purely for business use. There are a number of different commercial loan products such as, secured or unsecured, small business or start up loans, purchasing a new business loan and professional loans (doctors, dentists etc.). With the diverse nature of commercial loans, each with a unique structure, they also have different specialist lenders. Interest rates with commercial loans can be fixed or variable, and varying repayment periods from under a year, or up to 25 years or more. As per other loan products security available or equity can also affect the cost of a loan.

Regulate business cashflow, help business growth

Business needs to be able to afford repayments

Buying Land and Building a New Home / Construction Loans

Land settlements can sometimes take more than 6 months, which means that construction finance can be tricky to manage. A construction loan specialist, who works closely with builders can manage the process for you and let you concentrate on moving into your new home faster. Due to the longer buying cycle your mortgage broker will need to maintain your loan approval while you wait for your land to settle and building to commence, and choose a product suited to construction but without excessive rates and fees. A key characteristic of this loan product is its structure tailored for the progress draws required when constructing.

Pay interest only amount drawn down, smaller monthly repayments

Possible higher interest rate, penalties if construction delayed

Low Doc Loans

Low Documentation Loans have been designed for self-employed or small business operators looking to purchase a home. Typically, these buyers have limited access to financial paperwork in order to apply for a traditional loan. Generally, you will be an ABN holder and be able to provide personal bank transaction statements. The key difference in a low doc situation is that you are limited to the amount you can borrow, generally set at around 80% of the purchase price, meaning you need to find the deposit and remaining funds from savings

Not penalised for lack of financial statements

Limitations on borrowing capacity