Measure different home loans to fit your need

No-one wants to be saddled with a home loan that costs too much, so the golden rule is to research thoroughly. Even if home loan interest rates are at their lowest level in 50 years, you still need to work out what kind of loan suits your needs and then compare the deals different lenders offer for that specific loan product.

There is a bewildering array of evocatively-named mortgages in the market, from Westpac’s Rocket Repay and ANZ’s Breakfree variable-rate packages to the Bank of Queensland’s Clear Path loan and ME Bank’s Ultimate Offset account. But strip away the hype and there are just seven types of home loan:

Basic variable

The interest rate for basic variable rate home loans is typically 0.5 per cent below the standard variable rate. The no-frills basic loan doesn’t offer the additional bells and whistles found with most standard home loans, although it usually provides a redraw facility. The Catch-22 of basic variable loans is that many do not allow you to make interest-only repayments. You are required to make principal and interest repayments, which reduces flexibility and does not suit the planning needs of many property investors.

Standard variable

The interest charged on a standard variable loan is higher, so carefully evaluate what additional discounts are being offered. Lenders want you to sign up for a loan “package” giving them access to your personal banking. Taking out a Breakfree loan means your other accounts, including a credit card, are with ANZ. There are rewards and discounts. But be aware that while there is no upfront loan application fee, you pay a $375 annual fee and a $160 discharge fee applies when you close your loan account. Very similar charges apply with packages from other banks.

Discount variable

With this honeymoon loan, there’s a discounted interest rate for the first 12 months or for three years in the case of RAMS “Low Rate” loan, after which you pay the standard variable rate. Honeymoon loans work well for first home buyers but they can create difficulties for investors. You rarely achieve low ongoing costs but merely tap into cheaper finance for a short period. Discount loans are less widely offered these days. Lenders have been banned from charging mortgage exit fees, which makes it harder for them to hang on to borrowers once the honeymoon period ends.

Fixed loans

Fixed-rate home loans are presently priced well below variable rate loans. With a fixed product, the interest rate is fixed for a length of time you specify, usually for one to five years. Three-year terms are the most popular. Be careful, though. When you fix a loan, you are trying to outsmart the banks – no easy task. Most fixed loans limit the amount of extra repayments you can make and you’ll pay “break” fees to exit a loan early. Still, fixing part of your borrowings can make sense, particularly when fixed interest rates fall below 5 per cent as they have this year.

Offset accounts

Offset transaction accounts are now a feature of most standard home loans. You deposit your income into the account and the daily balance is offset against the amount owing on your home loan. If you have a loan of $1 million and a balance of $50,000 in an offset account, you’ll pay interest on $950,000. It’s a way to reduce taxable income, pay down loans and still have access to your funds. They are particularly popular with owner-occupier borrowers.

Line of credit

Lines of credit can be expensive loans but they’re highly flexible products. There is no pre-set loan term and the minimum repayment is for the interest only. You can withdraw funds from a line of credit transaction account by using a credit card or BPAY, so it can be a useful tool for investors who are renovating a property and making frequent transactions. Evaluate each bank product to get the best deal.

Professional package loans

Anyone needing a loan of more than $250,000 and who has substantial dealings with a bank should consider a professional package. Package loans open the door for borrowers to receive hefty discounts on the lender’s other financial products. You’ll benefit from decreased fees and interest rates on your mortgage and other linked products, but will pay an annual fee for the package, usually between $150 and $450. Ten or 15 years ago, this type of package was offered only to professionals such as lawyers and accountants. Now non-professionals can also apply and  get approval quickly.