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.
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.
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.