Home Loan Products
There are a few different home loan product to consider when selecting making the final decision for your finance and depending on your personal circumstances you may have a need for one type of product more than the other. Below are some of the different home loan product options to consider.
Principle and interest loans
Principle and interest home loan repayments mean you will repay the principle (the actual loan balance) and the interest amount applicable to the principle. With this type of home loan you will gradually reduce the principal (balance) of the loan.
Principle and interest is generally referred to as P&I repayments and the repayment amount is higher than paying interest only repayments. Current lending policy and the regulators associated with banking favour P&I repayments on home loans so as to reduce our national debt over time.
Depending on the individuals circumstances, they may only want P&I repayments or for certain circumstances they may want interest only repayments. These circumstances are considered below.
To calculate the P&I repayments you may need to make, go to our loan repayment calculator.
Interest only loans
Interest only repayments do not reduce the principal (loan balance) over time, they simply pay the interest calculated on the balance of the loan. Therefore interest only repayments are lower than P&I.
Interest only (IO) repayments may be preferred by investors who want to reduce outgoings (costs to hold the asset) as much as possible. This strategy can assist to build surplus cash for additional investment purchases.
IO repayments are typical when applying for a construction loan as lenders understand that during construction, it is beneficial to reduce outgoings and do not necessarily require principle to be repaid during this period.
IO repayments may also be preferred if there is a short term reduction in household income, such as maternity leave.
There may be many other reasonable requirements for IO repayments however there generally needs to be a suitable explanation for an IO request.
Variable interest rates
When looking at interest rates you have the option to select variable or a fixed term interest rate.
Variable means the interest rate will go up and down as and when lenders move their rates. There are pros and cons to variable rates simply due to the fact that if rates go down, you pay less interest, if rates go up, you pay more.
For example if the Royal Bank of Australia (RBA) increases the cash rate, lenders will likely increase their rates. There are some other reasons for interest rate movement but the point is that you have no control over the movement of the interest rate.
To emphasise this, if you have $1,000,000 owing to the bank and interest rates go up by half a percent (0.50%), that means you have another $5,000 of interest repayments to make per year, which can be significant depending on your circumstances. If it goes the other way (0.50% less), then happy days, you have some extra saving to tuck away.
Fixed term interest rates
Fixed term interest rates mean you choose to fix the rate for a period of time. Generally that is 1-5yrs fixed and in some cases it can be longer.
Fixed term interest rates can also be a good or bad choice depending on when you fix your rates and what happens with the market. For example if you fix at very low interest rates, thinking the rates will go up in the near future, and they do go up, then you made a great decision. However if you fix and the rates go down, then you are paying higher interest rates for the remainder of the fixed term of the loan.
There are some fine print details associated with fixed term interest rates such as break costs and rate lock options which you should speak with our mortgage brokers to ensure you have a full understanding of before selecting this product option.
There are also basic vs. professional products most lender have which you should discuss with one of our brokers.
To book an appointment, go to our contact us page, complete the form and we will send you an invite to meet and discuss in full detail all the above.