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Your home loan options

Your home loan options

The total cost of your home loan can vary substantially depending on the lender and home loan you choose. That’s why it’s important to consider all your options before committing to one particular home loan or loan type. 

To find the best mortgage for your situation, you’ll need to first consider the methods of repayment. Home loans with ‘fixed’ or ‘variable’ interest rate repayments are the two most common options. You can also choose home loans structured with ‘interest-only’ or ‘principal and interest’ (P&I) repayment schedules.

Variable home loan rate

With a variable rate loan, your lender determines the rate of interest you will pay – it can change at the lender’s discretion. The rate usually aligns itself – though not always – with the official cash rate set by the Reserve Bank of Australia.

Fixed rate home loan

If the thought of rising interest rates sends chills up your spine, then the option to fix the rate on your mortgage home loan can provide greater financial stability. Fixed rate mortgages commonly have a set rate between one and five years, and during that time the interest rate you pay never changes. Fixed rates can be a good option for those who prefer to know exactly how much money they will be up for each month, regardless of variable rate movements.

Principal and interest (P&I) loans

With a principal and interest option, the repayments will be higher than with an interest-only loan, as you are paying interest owing as well as repaying some of the capital borrowed. This style of repayment can help borrowers to reduce debt more quickly than interest-only option, because you’re chipping away at the balance straight away.

Interest-only loans

If you choose to make interest-only payments, you won’t pay off any of the capital. Consequently, repayments are lower than with a P&I loan. Generally, interest-only loans are more suited to investors, who aim to profit from the income and capital growth generated by the property – with the capital to be repaid in full, in one go, when the property is sold.

Shopping around online is a great way to help you secure a home loan that suits your circumstances. Why not compare home loans online, try out our home loan calculator or visit our home loans guide for further information.

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Learn more about home loans

What are the different types of home loan interest rates?

A home loan interest rate is used to calculate how much you’ll pay the lender, usually annually, above the amount you borrow. It’s what the lenders charge you for them lending you money and will impact the total amount you’ll pay over the life of your home loan. 

Having understood what are home loan rates in general, here are the two types you usually have with a home loan:

Fixed rates

These interest rates remain constant for a specific period and are a good option if you’re a first-time buyer or if you’re looking for a fixed monthly repayment. One possible downside of a fixed rate is that it may be higher than a variable rate. Also, you don’t benefit from any lowering of interest rates in the market. On the flip side, if rates go up, your rate won’t change, possibly saving you money.

Variable rates

With variable interest rates, the lender can change them at any time. This change can be based on economic conditions or other reasons. Changes in interest rates could be beneficial if your monthly repayment decreases but can be a problem if it increases. Variable interest rates offer several other benefits often not available with fixed rate home loans like redraw and offset facilities and free extra repayments. 

When does Commonwealth Bank charge an early exit fee?

When you take out a fixed interest home loan with the Commonwealth Bank, you’re able to lock the interest for a particular period. If the rates change during this period, your repayments remain unchanged. If you break the loan during the fixed interest period, you’ll have to pay the Commonwealth Bank home loan early exit fee and an administrative fee.

The Early Repayment Adjustment (ERA) and Administrative fees are applicable in the following instances:

  • If you switch your loan from fixed interest to variable rate
  • When you apply for a top-up home loan
  • If you repay over and above the annual threshold limit, which is $10,000 per year during the fixed interest period
  • When you prepay the entire outstanding loan balance before the end of the fixed interest duration.

The fee calculation depends on the interest rates, the amount you’ve repaid and the loan size. You can contact the lender to understand more about what you may have to pay. 

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 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.