Types of Mortgages Available
Before taking out a loan, it is important to understand what options are available. This is especially true for large and long term loans, such as mortgages and mortgage refinancing. Here are some of the main types of loans, as well as the benefits and drawbacks of each.
Variable Rate: The interest rate for these loans varies based on the rates that are set by the Reserve Bank of Australia, and how the lenders set their rates. These loans are fairly popular as Australian interest rates have historically been fairly stable. Within this mortgage category, there are two subtypes of loans: basic variable and standard variable.
Basic variable loans generally come with fewer features and options, however they usually have less fees. Standard variable mortgages often provide offset and redraw facilities. This gives you more convenience for repaying the loan, as well as transferring your money within the mortgage facility. Given their simplicity, basic variable loans can sometimes have a cheaper interest rate.
Fixed Rate: For a certain period of time, sometimes up to five years, the interest rate on these loans is not tied to the rates set by the Reserve Bank of Australia. When you lock into a fixed rate loan you know exactly what your interest rates are for a period of time. If you dislike uncertainty or predict that interest rates will rise in the future, then this loan is a good choice.
On the other hand, if interest rates fall in the future you are going to miss out on the potential cost savings. Fixed rate loans sometimes come with less flexible terms, so make sure you do your research beforehand. This may include limitations on extra repayments, exit penalties or similar constraints.
Split Mortgages: Also referred to as combination mortgages, these loans allow you to mix variable rates and fixed rates. A portion of the loan is subject to fixed rate lending, while the other portion has a variable rate. One of the main benefits of this type of loan is that it protects you from interest rate swings. It essentially acts as insurance when you are uncertain about future interest rates.
Honeymoon or Intro Rates: These mortgages provide a very low interest rate initially, usually for the first six to twelve months. After that the interest rate goes up to a normal level. This can be helpful if you need some extra cash in the short term.
If you use some financial prudence, these mortgages can also help you save money over the lifecycle of your loan. If you use this honeymoon period to make larger payments than you are required to, it can help you pay down the principal of the loan. This allows you to pay off the loan more quickly and reduce the total interest paid throughout the life of the loan.
How to Get a Mortgage
If you need financing for a new home or want to refinance an existing mortgage, Loan Monster can help. Fill out the form on this page with the requested information. We will contact you within 24 hours and can provide you with additional information about mortgages as well as answer any questions.