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Aussie home loan choices

Aussie home loan choices

You may wonder if the Reserve Bank of Australia (RBA) is setting the benchmark cash rate for lenders to follow, then why aren’t lenders strictly following this. It’s true that in reality many lenders make moves independently of the RBA, so it’s vital that you seek out the best home to suit your personal needs.

To find the best Australian home loans for your circumstances, work out whether you wish to have a fixed rate or a variable rate home loan. Likewise, you may prefer to make ‘interest-only’ or ‘principal and interest’ (P&I) repayments.

Fixed rate loan

With a fixed rate home loan, the interest rate is set in stone for an agreed term, usually from 1 to 5 years. Be aware, there are restrictions with a fixed loan. For example, your lender may limit the amount of additional repayments you can make, which may prove less appealing if you’re aiming to pay off your home loan sooner rather than later.

Variable rate mortgage

With variable rate Australian home loans, the interest rate fluctuates in tandem with a host of national and international factors such as changes to the RBA’s official cash rate. Variable rate home loans usually offer the flexibility of making extra repayments, which is useful if you plan to pay off the mortgage rapidly.

Principal and Interest (P&I) repayments

With a P&I option, the repayments will be higher than with an interest-only Australian home loan, as you’re paying the interest liability, and the capital as part of your repayments. This is a strategy worth considering if you plan to own your home outright.

Interest-only repayments

If you choose to make interest-only payments, you won’t chip away at the capital. As a consequence, repayments are lower than with a P&I loan. Generally speaking, interest only repayments are designed for investors, who aim to profit from the income and capital growth generated by a well-located, quality investment property.

Australians are spoilt for choice when it comes to picking a home loan. Websites such as Ratecity.com.au offer home loans from a range of banks, non-banks, credit unions and building societies, as well as a large selection of home loan features to help you compare some of Australia’s best home loans

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Learn more about home loans

What happens to my home loan when interest rates rise?

If you are on a variable rate home loan, every so often your rate will be subject to increases and decreases. Rate changes are determined by your lender, not the Reserve Bank of Australia, however often when the RBA changes the cash rate, a number of banks will follow suit, at least to some extent. You can use RateCity cash rate to check how the latest interest rate change affected your mortgage interest rate.

When your rate rises, you will be required to pay your bank more each month in mortgage repayments. Similarly, if your interest rate is cut, then your monthly repayments will decrease. Your lender will notify you of what your new repayments will be, although you can do the calculations yourself, and compare other home loan rates using our mortgage calculator.

There is no way of conclusively predicting when interest rates will go up or down on home loans so if you prefer a more stable approach consider opting for a fixed rate loan.

What is a variable home loan?

A variable rate home loan is one where the interest rate can and will change over the course of your loan. The rate is determined by your lender, not the Reserve Bank of Australia, so while the cash rate might go down, your bank may decide not to follow suit, although they do broadly follow market conditions. One of the upsides of variable rates is that they are typically more flexible than their fixed rate counterparts which means that a lot of these products will let you make extra repayments and offer features such as offset accounts.

Does the Home Loan Rate Promise apply to discounted interest rate offers, such as honeymoon rates?

No. Temporary discounts to home loan interest rates will expire after a limited time, so they aren’t valid for comparing home loans as part of the Home Loan Rate Promise.

However, if your home loan has been discounted from the lender’s standard rate on a permanent basis, you can check if we can find an even lower rate that could apply to you.

What is the difference between fixed, variable and split rates?

Fixed rate

A fixed rate home loan is a loan where the interest rate is set for a certain amount of time, usually between one and 15 years. The advantage of a fixed rate is that you know exactly how much your repayments will be for the duration of the fixed term. There are some disadvantages to fixing that you need to be aware of. Some products won’t let you make extra repayments, or offer tools such as an offset account to help you reduce your interest, while others will charge a significant break fee if you decide to terminate the loan before the fixed period finishes.

Variable rate

A variable rate home loan is one where the interest rate can and will change over the course of your loan. The rate is determined by your lender, not the Reserve Bank of Australia, so while the cash rate might go down, your bank may decide not to follow suit, although they do broadly follow market conditions. One of the upsides of variable rates is that they are typically more flexible than their fixed rate counterparts which means that a lot of these products will let you make extra repayments and offer features such as offset accounts.

Split rates home loans

A split loan lets you fix a portion of your loan, and leave the remainder on a variable rate so you get a bet each way on fixed and variable rates. A split loan is a good option for someone who wants the peace of mind that regular repayments can provide but still wants to retain some of the additional features variable loans typically provide such as an offset account. Of course, with most things in life, split loans are still a trade-off. If the variable rate goes down, for example, the lower interest rates will only apply to the section that you didn’t fix.