Types of Mortgages

There are many types of mortgage, each with its own interest rate, fees and flexibility. All these things affect how much the loan costs you and when it will be paid off. Your interest rate may be fixed, floating or a mix of both. And there are different repayment structures to choose between.

Interest rate

Fixed interest rate loans

With a fixed rate home loan the interest rate you pay is fixed for a period of six months to five years. At the end of the term, you can choose to re-fix again for a new term or move to a floating rate.

Tip: Consider your options - choosing the wrong type of mortgage could cost you thousands.

Advantages:

  • You know exactly how much each repayment will be over the term.
  • Lenders often compete with fixed rate specials.
  • You can lock in lower rates if market interest rates are rising.

Disadvantages:

  • Fixed rates often have limits on how much you can lift repayments or make lump sum payments without paying charges.
  • If you take a long term, there is a risk floating rates may drop below your fixed rate.
  • If you choose to sell your property and/or break your fixed loan you may be charged ‘break fees’.

Capped rates are a variation where the interest rate can’t rise, but will drop if floating rates drop below the capped rate.

Floating rate (or variable rate)

Lenders of floating rate loans will lift or lower the interest rate as interest rates in the wider market change, normally linked to the Official Cash Rate (OCR). This means your repayments may go up or down.

Advantages:

  • You have greater flexibility to make changes without penalty, such as paying off the loan early or changing the loan term.
  • It’s easier to consolidate other costlier debt into floating rate loans by borrowing more.
  • Right now, floating rates are lower than most fixed rates.

Disadvantages:

  • Floating rates have historically been higher than fixed rates – this isn’t the case now, but things can change.
  • When rates go up the repayments also go up, putting a squeeze on your budget.

A mix of fixed and floating

You can split a loan between fixed and floating rates. This lets you make extra repayments without charge on the floating rate portion.

Splitting your loan can give you a balance between the certainty of a fixed rate and the flexibility of a floating rate. How much of your loan you have in each portion depends on which of these is more important to you.

Table loan

This is the most common type of home loan. You can choose a term up to 30 years with most lenders. Most of your early repayments pay off the interest, while most of the later payments pay off the principal (the lump sum you borrowed).

You can take a table loan with a fixed rate of interest or a floating rate.

Application fees for table loans range from nothing to over $1,000. Most lenders charge around $200 to $400. This is often negotiable.

Advantages:

  • Table loans provide the discipline of regular payments and a set date when they will be paid off.
  • They provide the certainty of knowing what payments will be, unless you have a floating rate, in which case repayment amounts can change.

Disadvantages:

  • Fixed regular payments might be difficult for people with irregular income.

Make sure when it comes to a huge purchase like your home you do your reasearch and find what will work best for you.

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