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Home Loan Interest Types
Variable Rate Home Loan
This term is applied to any home loan that is not subject to a Fixed Interest Rate, Honeymoon Interest Rate or an Introductory Interest Rate. In most cases the Basic Home Loan, Standard Home Loan and Line of Credit Home Loan will be set as a Variable Rate Home Loan. Capped Home Loans and Controlled Rate Home Loans are seen as Variable Rate Home Loans within the parameters set as their “Cap” and “Floor” rates.
Advantages
Because the interest rate is variable, the customer can make additional repayments without paying penalty costs. This can help to pay the loan off faster.
If interest rates fall, the customer’s interest rate will also fall and they may be able to reduce their repayments if they wish. If interest rates fall and the customer continues to pay their current repayment, the loan can be paid off faster.
Disadvantages
The main disadvantage is that if interest rates rise, the customer may have to increase their repayments and or take longer to pay off their loan. If interest rates rise significantly, the customer may not be able to pay the increased amount of the repayments and may need to refinance or sell their home.
Remember the 1980's where interest rates went up to 17%.
TopFixed Rate Home Loan
The operative word here is CONDITIONS
Fixed Rate Home Loans allow customers to "Lock In" their interest rate for a fixed period usually 1,2,3,4,5,7 or 10 Years. Not all Lenders will offer this full range of terms, and interest rates can vary significantly between Lenders depending upon their expectations of future interest rate movements.
The rate applicable to the term chosen will remain the same over that term irrespective of further interest rate movements.
Once the fixed rate period expires, the customer will generally be offered to select another Fixed Rate period. If this is not the case or the customer does not wish to select another fixed rate period, their interest rate will generally revert to the Lender's Standard Variable Home Loan rate.
Advantages
Customers know exactly how much their repayments will be for a set period of time.
If interest rates rise, customers interest rate and repayments will not be affected during the term of their fixed rate. This allows customers to plan ahead with regards to other finance matters without worrying about increased home loan repayments.
Disadvantages
If interest rates fall, the customer’s selected interest rate will not fall during the fixed period.
If the customer wishes to get out of the fixed interest rate arrangement, additional costs will be payable.
The Lender may not allow additional repayments during the fixed rate period or may restrict the amount of additional repayments during the fixed rate period of may charge a fee for additional repayments during the fixed rate period.
TopCombination Home Loan
This term relates to situations where customers wish to select more than one type of home loan. For example, a customer may wish to have part of their loan on a Variable Rate Home Loan and the balance on a Fixed rate Home Loan. Most lenders will allow their customers to make this type of arrangement.
Advantages
By putting part of their loan on a Variable Rate Home Loan and part of their loan on a Fixed rate Home Loan, a customer can have the flexibility of being able to make additional repayments on their Variable Rate Loan whilst at the same time have comfort that at least part of their borrowings will not be affected by interest rate increases.
For investors it allows them to separate Investment loans that are "Tax Deductible" from Non-Investment loans, which are not "Tax Deductible".
Disadvantages
Some Lenders will restrict the amount of "Splits" (different loans) a customer can have or the "Type" of loans a customer can include in their Combination Home Loan arrangements (for example Basic Home Loans).
If the Lender charges monthly or other on-going fees on their loan accounts the customer may have to pay a fee on each loan in the Combination Home Loan structure.
Some Lenders will charge an additional fee to set up Combination Home Loans.
Probable customer type
A person hedging their bet against interest rises i.e.:- a fence sitter who fixes 50% of the loan and leaves the other 50% on variable.
As in the investor, they may have 2 lines of credit. One for an investment property and one line of credit that may be used to purchase shares, then another split for their home residence mortgage.
Remember the more splits, the more cost and each lender may have the limit on the number of splits and which products can be combined.
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